The global finance industry today is dominated by a few key financial hubs. New York, London, Hong Kong and very few others have concentrated much of the world’s financial activity across banking, asset management, insurance and capital markets, and have therefore served as nerve centres for the global economy, in some cases since the beginning of the 20th Century. Alongside these global centres, finance has also concentrated into regional, or secondary financial centres such as Shanghai, Singapore and Frankfurt, whose importance has depended on the political and economic fortunes of their countries, the largest of which are challenging the biggest hubs for global leadership.
During the next decade however, the global finance industry stands to be fundamentally transformed by three major transitions. The first being the ongoing transition from the Industrial Age to the Information Age, information and digital technologies are already fundamentally transforming large parts of the world. And the second is the global shift to sustainability in terms of both environmental sustainability and sustainable development more broadly which is now a mega trend. Both of these are playing out in the midst of a third powerful force, the rise of great power concentrated in emerging power blocs and nations as the world continues to move from a unipolar, Western-dominated context to a more multi-polar and global one.
Given the finance industry’s critical position in the global economy as the primary allocator of capital, it has a major role to play in facilitating the broader transitions facing industry, countries and trade, which in turn will impact the global flow of funds, create new business models, open new markets and lead to the innovation of new products and services. Incumbent financial institutions the world over will need to make radical changes to their models of financing sustainability, digital transformation and rising powers, and this will happen in stiff competition with new entrants arising as a result of these shifts in the way the world works.
The impact of these disruptions will not be restricted to financial institutions, they represent a game-changing challenge and an opportunity for the world’s financial hubs, who too will need to adapt to the new economic, political and competitive realities. The prerequisites for success are in some ways the ones of every point in history where the world transitioned its power structure, but are also quite different given the overwhelming shift to a sustainable information era. As a result, the leading financial hubs of the 20th Century are set to see their positions shift in the league table of finance. This month’s Sign of the Times presents a summary of its report, to be published, on the key factors that are set to determine winners and losers in the next generation of global financial hubs and what that means for leading hubs such as New York and London as well as the rising hubs in Europe and Asia.
- A series of global discontinuities are transforming the world, of which three are paramount; the shift to the information age, the megatrend of a more sustainable model for the world including the accompanying energy transition and the emergence of a multi-polar world driven by four independent superpower blocs: the US, the EU, China and India.
- These discontinuities are fundamentally changing the way businesses across all sectors will need to operate, and finance is not only not an exception, it is a major force for change.
- Financial hubs have been among the most important centres of global wealth creation in the Industrial Era and have a critical role to play in the coming transitions, but current leading hubs will need to reinvent themselves to maintain their relevance, and some will become far less important.
- Future leading hubs will require more than a scaled asset base and business activity, given the global scale of the challenges facing the world, future leading hubs will need to finance solutions to issues to be relevant requiring scale and innovation in applying finance and in a world of four superpower blocs, the economics of these blocs matter.
- These shifts will lead to a fundamental repositioning of the relative strength of financial hubs over the coming decades, as the world shifts to the sustainable information era and the economics of power place the financial hubs of four superpower blocs – the US, EU, China and India - in the top league.
- As part of this transition two different models for future financial hubs are emerging: one focusing on strategic decision making in the global allocation of capital and one based on asset gathering and the distribution of financial services.
- Many current global financial hubs like Hong Kong and Singapore will see their positions erode in the coming decades, and despite its strengths and history, London is set to decline given its declining strategic relevance based on its alienation from the EU, making it also less important to the US, its rising conflict with China, and current lack of strategic relevance to a rising India.
- There are a number of strategies today’s hubs can employ to defend or even improve their relative positions, including the ability to allocate capital for financial and broader inclusion in developing powers and countries using digital strategies to overcome the limitations of their physical location.
Major Discontinuities Driving Change Across the World
The world is at the end of the carbon-based industrial era, and the energy transition currently underway is set to transform the world, with 118 countries representing over 60% of global GDP having set target dates to achieve net zero carbon emissions. This coincides with the world’s on-going transition to the information era, spurred by a brutal pandemic in which the only way to continue some aspect of normal life was by digital means for those that could.
The global sustainability mega-trend is broad, encompassing the environment and human sustainability.The worldwide stripping of natural resources is the result of innovation not keeping pace with demand in a globalised world, with current global resource consumption levels are over 75% greater than the Earth’s estimated sustainable resource production capacity. This has brought on the need for dramatic measures to conserve and protect, to include in development those parts of the world population left out, to innovate for lost natural resources and to rethink the model for how we live.
The energy transition underway is part of the broader shift from the Industrial to the Information Age. Digital technology, which provided an essential lifeline to many industries communities and entire during the pandemic, has pointed the way to an information era future, proving to be a critical solution in crisis, enabling people to remain connected to each other for work, education, information, entertainment, supplies and more and have accelerated the shift to a very different future from the physical one of the past. The digital transition of businesses has accelerated sharply due to the global pandemic, with the percentage of products and services that are fully or partially digitised increasing from 35% to 55% over the same period. 2
Accompanying these mega-trends is a global shift in geopolitical and geoeconomics power, and China’s GDP will potentially overtake America’s a decade or so from now. A country’s power however manifests itself in multiple ways: economically, militarily, political, socially, technologically, geographically, and demographically, and based on these broader criteria there are four major power blocs that will have the potential to set the rules of engagement for the coming world order: the US, China, the EU, and India, who collectively represent nearly 70% of global market cap, 63% of global GDP, and 45% of the world’s population.
The next 10 years are critical in determining the world’s ability to survive well. The 17 United Nations Sustainable Development Goals set the targets that the world needs to achieve in the coming decade to avoid irreparable harm to our ecosystem, our communities, and our socio-economic systems. These goals cover critical environmental, social and economic objectives that the world will need to achieve as a matter of survival. Beyond 2030 however, if the SDGs provides the basis for the survival of humankind, then the transition to the information age provides the basis for the next stage of its civilisation.
This drama is unfolding during the rise of new powers with a new multilateralism with conflict brewing between great powers. It is increasingly clear that the world’s current industrial economic model and the financiers and financial hubs that built it will not survive these changes.
The Finance Industry and Their Hubs in Context
Financial hubs have been critically important throughout history providing the platform for growth and excellence. It is well accepted that as more financial institutions concentrate in one locality, they become centres of excellence that attract talent, foster innovation, attract risk capital, and thereby give rise to new industries and their leaders. As in many industries, financial services activities globally have clustered into a series of hubs with a high concentration of banks, asset managers and financial intermediaries, as well large financial markets and exchanges. These hubs represent the key nodes in global financial and economic network through which capital flows and allocated. Given the sophisticated infrastructure, regulation and human capital requirements of leading financial hubs these are typically major global cities.
Today’s financial institutions are the product of industrialisation and, like those of the preceding Agrarian era, face an existential threat in the shift to the information era.The Industrial Age gave rise to modern banking and the modern financial system, supplanting older financial models like goldsmith banking and merchant banking. Many of today’s industry titans were founded to finance the industrial innovation and the build-out of the First (particularly in Great Britain) and the Second (in Europe and Japan) Industrial Revolutions in the 18th and 19th centuries, or to fund the expansion of a recently independent and burgeoning United States roughly between these periods. The Information Age will lead to a similar transformation in which current leaders will need to reinvent themselves or be supplanted by challengers who embrace the new models of finance. The financiers of the agricultural era did not go on to become the behemoths that financed the industrial revolutions and it should not be assumed that the current financial giants of the Industrial Age will be the ones to survive the transition to the information age.
The finance industry has a key role to play in the transition to the Sustainable Information Age. As the allocator of c.90% of the world’s net liquid assets, the finance industry receives and provides the funds that enable consumers to consume, manufacturers to manufacture, traders to trade, scientists to invent and politicians to govern, resulting in a disproportionate ability to reshape the entire global economic system.
For it to fulfil its potential the industry will need to fundamentally reinvent itself, financing both the huge shift away from unsustainable assets, processes and technologies while also financing the ‘moon shot’ investments to innovate and scale the sustainable information age alternatives, in energy, resources, medicines and more. This will in turn likely require a model shift for both individual financial organisations, and for the financial hubs in which they concentrate, as well for the financial system as a whole. The information age changes what matters for financial hubs too. As the transition to the Information Age continues to transform the financial system, it will also change the drivers of value for financial hubs, with those that fail to adapt being stuck in industrial era models. The industrial era hubs will assume they are powerful based on the volumes of business that they process, the subsidiaries of foreign financial institutions they host, the float of their stock exchanges and the assets under management.
The financiers of the agricultural era did not go on to become the behemoths that financed the industrial revolutions and it should not be assumed that the current financial giants of the Industrial Age will be the ones to survive the transition to the information age Knowledge and IP emerge as key value drivers for financial hubs. In information age economies, the key drivers of value are knowledge, intellectual property and innovation. In the tech industry, Silicon Valley was the first hub of the Information Age, home of the integrated circuit, the microprocessor, and the modern computer, and it leapfrogged the previous era’s lower tech industrial hubs in terms of relevance. The same drivers and forces can be expected to impact financial hubs too.
The world’s financial hubs are set to split into those with global power positions and others. The Today’s financial centres will be split between those that make strategic decisions on the allocation of global capital and those that distribute for them superpower blocs gaining the leading positions stemming from their political and economic positions in the changed world and the rest serving as distribution centres for financing and trading based on the volume of their capital flows. The most powerful of these hubs in their two segments will be those that are home to constituent financial institutions with innovation, and ambition, being the place where products and services are originated, and strategic decisions are taken. The leading hub will fund the Sustainable Development Goals and the technologies and systems that will enable the transition to a very different future, and they are the hubs that will capture the most value, using other hubs as distribution centres.
Leading Financial Hubs Determined by Global Power Position in a Rapidly Emerging Sustainable Information Era
Which financial centres will lead this transition and emerge as the most powerful hubs of finance in the future? The answer depends on a complex series of interconnected factors. However, geo-political and geo-economic factors will be the important context within which innovation and adaptation to the mega-trends of sustainability and digitisation will be played out in a highly competitive battle between financiers and between their financial hubs.
Today’s financial hubs are the legacies of empires and superpowers. London rose to prominence as the global centre of trade and finance with the rise of the British Empire, just as New York’s own emergence as a global finance hub coincided with America’s rise to superpower status at the beginning of the 20th Century. Hubs clearly do not exist independently of the countries within which they sit and the positions, ambitions, capabilities and resources of their host countries are critical factors that determine their relevance, rise and fall. So, geography, history and politics matter too of course; where hubs are located, how they fit into their host countries, the power of those countries in their regions and the world.
Five Key Strategic Factors of Position
The key factors that impact the pecking order of financial power, and therefore of the hubs that manifest that power, include the following:
Superpower Legacy. Political and economic superpowers attract wealth and trade and their financial centres become global hubs as a result. And while the flow of power across the world ebbs and flows over time, hubs’ positions appear to be sticky. Amsterdam rose to become the most Today’s financial hubs are the legacies of empires and superpowers … so can London and New York survive as the world’s key hubs if they were to lose geopolitical and geo-economic power? important financial centre in Europe when the Netherlands became the foremost maritime and economic power in the world in the late 16th and 17th Century, a position that the city held on to for over a century after the Dutch Republic itself had fallen back into geopolitical insignificance. The rise of other powers erodes position, as London’s rise to primacy in the wake of the rise of the British Empire demonstrated.
Of course,political decisions can also undermine and erode positions and while London’s status as a leading global financial centre survived the collapse of the British Empire - leaving it with global distribution from its imperial days and with access to the biggest trading bloc in the world, the EU - Brexit has now cut it off from the EU trade flow and siphoned off its regional clout and undermined its geopolitical positioning, with an estimated US$1.6 trillion of capital shifting away from London and certain key functions, skills and talent too. Also, a few decades after the ambitions and innovations in the Middle East in particular to establish financial hubs, it is becoming clear that money alone is not enough to establish a global hub, and so despite their best efforts the hubs in the region are important to their countries and the region but remain marginal in terms of the global flow of capital.
Current and Emerging Power Blocs. If historical positioning is important, future positioning is of course even more so. US hyperpower status at the turn of the millennium has given way to a more bipolar world with China emerging as a counterweight to American power. Next to these two is already the EU as one of the most powerful trading blocs in the world and this garners it much clout, regardless of its gradual political integration or not. Looking ahead, India’s economic rise and increasing geo-political importance to both America and the EU make it a natural partner in Asia as it seeks to balance China. The rise of these four powers is a critical factor in the development of a more multi-polar world over the coming decades. While other regions may well rise longer-term, these four blocs are best positioned to be the key geo-strategic actors through 2050, ensuring that their financial hubs will be centres of global economic activity in line with blocs’ interests and priorities.
Geo-strategic Assertiveness. Countries and regions that are politically (and economically) assertive, placing big bets and with big risk-taking capacity stand to capture a greater share of power Countries and regions that are politically and economically assertive, placing big bets and with big risk-taking capacity stand to capture a greater share of power and value geopolitically which America did last century and China is doing now and value geopolitically. The US demonstrated this assertiveness in the 20th century, and China is demonstrating it today, vigorously extending its global influence – with its the Belt and Road Initiative, in the South China Sea, through African and Latin American investments - while defending its homeland from external interference (through economic protectionism and control over the flow of information), allowing it to project significantly more global power than others, even if they for now have larger economies, such as the EU. Powerful players that can successfully promote their standards, their businesses and their capital abroad will capture a greater share of global financial activity for their centres.
Relevance. A financial hub’s relevance depends not only on its absolute size in terms of assets managed or deployed, but on the impact its actions have on the world. Successful financial hubs will therefore be the centres from which capital is deployed to address issues of global relevance. These issues represent large and growing investment opportunities in their own right, and hubs that position as global centres for these themes will attract further capital and IP as a result. e.g., full financial inclusion for the 70% of the global population that is un- or under-banked could create US$100 trillion in financial assets over the next 50 years, while funding the climate transition represents an over US$130 trillion opportunity. Having a significant impact on these themes will require countries, hubs and companies to deploy capital at scale in a series of big bets that lead the industry and influence long-term global capital flows.
Innovation. Of course, future financial hubs’ positions will depend on their ability to adapt to the major discontinuities facing the world. As laid out above, the disruptions created by the shift to the Importantly, the financial hub of the future does not exist. The transition to that future will see current hubs change their relative positions but the hub of the future that is most fit to meet the needs of the information age to come is still an open contest in a world of big bets to address major issues and opportunities, global innovation and rising geo-political and geo-economic competition information age will place significant strains on financial services institutions, financial hubs and the financial system as a whole. Financial institutions will need adapt to a digitised, decentralised and more automated world, competing against a range of new tech-enabled entrants, requiring them to develop and adopt innovative technologies of their own further, solving issues of global relevance will require hubs and the companies that they host to develop new specialised products, services and business models, which again will require these companies to innovate.
The Financial Hubs of the Future
The wide range of political, economic, technological, social and environmental factors above represent the key determinants of success for leading financial hubs in the future, which lead to 11 key drivers, including:
Stock of Economic Power of Countries and Blocs. The absolute scale of the economic might that the hub represents and/or finances relative to others.
Economic Power Assertion of Countries and Blocs. The global economic power assertion that the hub facilitates across the world.
Strength of Asset Base. The scale of a hub’s asset base and financial ‘firepower’.
Strategic Decision Making. The volume of capital globally directed or controlled from the hub.
Financial Innovation. Delivery of financial innovations to meet market needs and capitalise on opportunities.
Funding Big Bets. The scale of risk-taking and big bets being taken in a hub to solve major global issues.
Sustainability Transition Finance Capacity. The funding capacity and propensity to fund major sustainability transitions from the hub.
Scaling New Technologies and Businesses. The ability to foster innovation and rapidly scale breakthrough technologies and businesses.
Digital Finance and Inclusion. The ability to drive financial inclusion through digital finance to ensure its future relevance to the world, domestically and/or globally.
Multi-Lateral Institutions and Thought Leadership. The hub’s connection and access to major institutions and thought leadership that will drive innovation, standards and have a bearing on the direction of future global capital flows.
Business Environment, Human Capital and Infrastructure. Traditional success factors for financial hubs that will continue to be relevant in the future.
These factors are critical determinants in the flow of global capital in the future, leading to major shifts in global financial power and in the position and value of hubs from which it is exercised. The table below summaries the potential ranking of global financial hubs in 2050,
Table 1: Sustainable Information Age Financial Hub Ranking 2050
The Key Success Factors for Future Financial Hubs
Financial hubs’ performance and relative position against each of the 11success factors have been measured using a set of specific criteria and metrics described below, alongside a summary explanation of each criteria’s relevance in shaping a hub’s ability to be a future leader of the global finance industry.
1. Stock of Economic Power of Countries and Blocs.
As China’s economic power rises, its financial hubs are set to rise to the fore … and alongside the hubs in the US, EU and India, these four will form the financing centres of the four great power blocs of the future
After more than a century of US and allied dominance, global economic power is expected to shift significantly in the coming decades,away from the status quo in which countries representing less than 10% of the global population generate nearly half of global GDP. China is set to overtake America in absolute GDP term in the 2030s, while India’s huge population and rapid development are expected to drive its emergence as a fourth global power alongside China, the US and the EU.The shifts to 2050are likely to lead to significant changes in the power and influence of the financial hubs from which their economies and financial systems are managed.
Table 2: Economic Power (Nominal GDP) of Global Financial Centres by Country and Bloc.
2. Economic Power Assertion of Countries and Blocs.
For the US and India, the EU, and its member states, are set to become their key ally given the EU’s scale as a major consumer, investor and trader and the essential counterweight to the huge market and assertiveness of China
A country’s actual economic and political power assertion is also critical. In the 20th Century the imperial model of power projection by way of land acquisition and overseas military presences has been replaced by predominantly economic power projection through trade and investment, with countries ’ hubs serving as nexus points for the global flow of capital, goods and services, channelling their host countries’ power and influence in the world.
Table 3: Global Economic Power Assertion (Trade and Outward Direct Investment) of Hubs by Host Country Ranking
3. Strength of Hub Asset Base
Beijing’s lead in terms of its scale of assets – across asset management, banking and insurance – is expected to widen further as China’s absolute share of global output continues to grow to be allied
The scale of a hub’s asset base can be measured by the amount of financial activity it supports, including its total assets under management, its loan volumes and the gross written premiums it facilitates.Scale matters given that the amount of capital required to fund the ‘Great Transformation’, to the sustainable Information Age, is vast. The SDGs alone face a funding shortfall of at least US$40 trillion through to the end of the decade, while the world needs to spend US$131 trillion on the energy transition by 2050 to hit Paris targets on global temperature rise . Solving these challenges requires radical mobilisation and allocation of the world’s capital flows by leading financial hubs.
Table 4a: Strength of Asset Base, Assets Under Management of Global Financial Hubs2020-2050
Table 4b:Strength of Asset Base, Loan Origination of Global Financial Hubs 2020-2050