Asian fintech firms are the forefront of the fund distribution revolution, but Europe isn’t too far behind, says Fundsquare’s Olivier Portenseigne
Progress in most industries tends to be incremental, but every so often a new disruptive technology emerges that has the potential to shake up an entire business model. In the funds industry, that technological leap looks set to come from blockchain.
Many fund managers are now familiar with blockchain. Its distributed ledger technology (DLT) threatens to radically change the way that investors access funds, creating opportunities for disintermediation within the fund distribution supply chain, and for significant cost savings. "A number of factors are driving this disruptive technology: regulatory issues, a general mistrust in financial providers, and outdated physical infrastructure and legacy systems. All of this suggests that it is only a matter of time before we see the industry succumb to Blockchain. What is less clear is exactly how the fund industry will emerge from the post-Blockchain era and what role intermediaries will play."
Asia is fundamental to industry transformation for two reasons. Rising levels in private wealth across Asia have placed Asian investors and their demands at the centre of any new fund model—according to the Boston Consulting Group, private wealth in Asia is likely to surpass that in Western Europe in 2019, reaching a projected $55 trillion.
Moreover, financial technology companies in Asia are creating innovative solutions that will radically change the customer journey from financial planning and investment management to fund distribution. Even financial advisors are not immune to the tide of change. They could soon be replaced by so-called robo-advisors, which automate the asset allocation process and allow for a personalised user experience at a much lower cost compared to traditional service providers.
Large Asian financial players and angel investors are taking note and investing heavily in fintech companies operating in a range of financial sectors. According to Bloomberg, fintech funding for start-ups in the region surged to $10.5 billion in the first nine months of 2016, more than double the $4.3 billion seen for the full year in 2015.
Managing Director & CCO (Fundsquare)
A number of factors are driving this disruptive technology: regulatory issues, a general mistrust in financial providers, and outdated physical infrastructure and legacy systems. All of this suggests that it is only a matter of time before we see the industry succumb to Blockchain. What is less clear is exactly how the fund industry will emerge from the post-Blockchain era and what role intermediaries will play.
In Europe, efforts to introduce blockchain technology into the industry are beginning to take shape as well. Fundsquare has partnered with InTech and KPMG to launch FundsDLT, an experimentation of a new decentralised fund order processing engine based on distributed ledger technologies, digital tokens and smart contracts. The aim of FundsDLT was to create a shared economy allowing asset managers, in cooperation with existing actors, to sell funds directly to retail investors.
The operating model allows an investor to go through a smartphone application, accessing fund information and performing know-yourclient (KYC) duties, then processing an order by provisioning cash through digitalised token. On the other side, transfer agents will inspect the KYC elements collected and accept the order, while an asset manager can follow up inflows and outflows in the registrar in real time. Once the net asset value (NAV) has been published, the entire settlement process can be executed instantaneously.
FundsDLT is intended to operate through an application programming interface framework that delivers an open standard covering account creation, transaction processing, KYC, payments and entitlements. This is expected to lead to broader changes in Luxembourg’s pool of expertise. Intermediaries like transfer agents have great stores of knowledge and are well placed to play an active role in the industry’s revolution.
Putting the consumer first
FundsDLT is designed to benefit all aspects of the supply chain. It is expected to reduce the cost and processing time for transactions by streamlining administrative and order-routing tasks. For example, it can currently take up to three days for a transfer agent to execute an order taken from a client. This new fund distribution product will do this a couple of hours after NAV publication and, in the not-toodistant future, with multiple NAVs per day.
The proposed ecosystem created by FundsDLT will also ease antimoney laundering and KYC verification, and verification under the Markets in Financial Instruments Directive (MiFID) regime, by standardising the process and factoring repetitive tasks into a centralised utility. These capabilities draw on smart contracts, often considered to be one of the most secure transaction technologies in existence. As a result, investors, asset managers, custodian banks and transfer agents will be able to share information in a far simpler manner.
More importantly, FundsDLT will work towards providing investors with greater choice. As low interest rates make saving for the future an ever more daunting task, investors will need to take an increasingly active role in managing their pensions. By creating a single ecosystem for funds, investors can get better access to information and choose from a wider selection of funds. A new fund ecosystem like DLT can also reduce barriers to entry and bring so-called ‘mass affluent investors’ into the market.
Getting investors on board will be crucial if the industry is to take the next leap. Asia will be ground zero of the industry revolution - but Europe is quickly catching up.
Asset Servicing Times, issue 162