We find ourselves at a critical mid-point in the half-century-long transformation of the world’s financial markets that began in the 1970s and will continue well into the next century. The last decade has been one of extraordinary upheavals for financial institutions in the United States. The next looks as if it may well bring much the same disruption to the markets and institutions of Europe and Japan.

Many of the defining features of the financial sphere and the players that populate it are in the midst of profound and unstoppable change—change in how financial firms make money; in how and by whom they are regulated; in where they raise capital; in which markets they serve; and in what role they play in society. It is, of course, impossible to see exactly what lies at the end of this process of transformation, but an understanding of the forces that are driving it—technology, globalization, emerging markets, demographics, and the increased willingness of financial firms to compete with one another—can provide some glimpses of where this transformation is heading.

The limits of banking

Let’s begin with technology, since changing technology is in many ways the most fundamental of these forces. The first thing...