The Rise of Fintech in Asset Management

Venture Capitalists and Private Equity firms are beginning to inject unprecedented amounts of money into fintech start-ups and the long standing and traditional financial services sector is certainly facing a period of unsettlement. The words ‘fintech’ and ‘disruption’ have become synonymous when thinking about the future for financial services, this Blog aims to take a closer look at why fintech is growing so rapidly and what it means to asset managers and financial services firms.

The recent Apex Blog, Turning the Corner into 2016 – Market Impacts, discussed the trends toward diversification amongst asset manger portfolios and the merging of asset classes in order to compete. It can be said that one of the ‘disruptions’ leading to this change is the rise of fintech, and with our ever increasing reliance on technology it seems that the momentum of influence and investment in this market is set to continue increasing.

Firstly, what is fintech?

Essentially, the fintech sector is an economic industry comprised of companies delivering technologies that improve and innovate financial service solutions. Fintech companies intend to simplify, streamline and expedite financial services processes and it is perhaps not a coincidence then that these firms began their rise at a time that coincides with the global financial crisis of 2007-09. As banks pulled away from lending, fintech start-ups were able to capitalise on that opportunity and deliver competitive products to a sector traditionally dominated by big institutional banks. There is huge variety in the different financial tech offerings available. To narrow it down, we have listed a brief overview of some of the most talked about segments on the rise in this arena:

• Peer-to-Peer (P-2-P) lending:

Peer-to-Peer lending has become widely popular over the last few years through providing an alternative way to get a loan.

• Crowdfunding:

Similar to P-2-P, Crowdfunding emerged as a much needed alternative method of obtaining funds for start-ups as the banks scaled back their lending scope.

• Mobile Payment Apps:

In an increasingly tech-savvy world where consumers demand instant and interactive access to all products, mobile payments have rocketed in popularity; mobile payment volumes in 2015 were reported to be worth $450bn USD and this is predicted to reach to $1 trillion USD in 2019.

• (FX) Foreign Exchange platforms:

FX services that are far more responsive can be delivered via fintech firms enabling No Dealing Desk (NDD) execution of trades with no spread involved.

• Trading Platforms:

Trading Platforms are becoming increasingly popular to both retail and institutional investors. These platforms open the opportunity for investing to a far wider audience through lower fees and instant access.

The growth stats

In a report issued by professional services firm Accenture, it is stated that the value of fintech global investments reached $12.3 billion in 2015. In the first quarter of 2016 alone an additional $5.3 billion was added to the sector, 50% of which came via APAC. Now a prevalent region for fintech investments, APAC quadrupled its regional assets in 2015 (predominantly through China and India), and has become the second biggest region for fintech investments after North America.

The Accenture report suggests that not only are fintech start-ups changing the way the financial services sector behaves, but that… “technology giants such as Google, Apple, Facebook, Amazon and Alibaba (GAFAA) are redefining the customer experience and increasingly playing around the periphery of financial services”.

Click Here to read the full report.

What does this mean to asset managers?

Is there opportunity to be found in this sector? It seems there is, as according to Citigroup, around $19 billion of incremental investment has flowed into the sector over the last year. Strategies such as crowdfunding have been attracting increasing interest over the past few years and even look set to outpace venture capital funding in 2016 based on recent emerging trends.

Some fintech firms are releasing products and introducing tools that not only cut costs but assess risks, allowing smaller investors and allocators the ability to perform their own due diligence without the burden of costly overheads. This type of innovation and the independence it offers to smaller firms and retail investors has proven attractive and in turn injected pace into the trend toward fintech allocations.

However, there has still been a lot of discussion around the disruption caused by fintech in the consumer banking and payments segment. The PwC report also examines the way in which fintech is impacting the asset management sector, demonstrating how over 50% of the asset manager respondents to their survey thought that the asset management industry would be disrupted.

The future for fintech

As more robust and increasingly innovative products are released at a rapid pace, fintech is beginning to shape the investment landscape on a global scale.

Mark Pugh, UK asset management leader at PwC, said: “It’s still early days for asset management firms and their interaction with start-up disruptive companies but we are seeing asset manages beginning to put aside money to investment in innovation and fintech.”

Some fintech technologies do have the potential to completely reform the financial services industry through delivering more robust, faster, and far superior systems to exciting processes. It appears that the most successful banks and fintechs will be the ones that learn to work together not against one another. Although the common perception is that fintech is disruptive, the traditional banking sector is so entrenched it is highly unlikely to be totally usurped by fintech anytime soon.

As asset managers look for investments that will enable growth in a volatile market and as transparency replaces paperwork, the opportunity for investing in more complex financial products will become increasingly widespread. The increase in competition brought by fintechs could mean lower costs across the entire investment process which could feasibly result in a positive; higher returns for investors.

Click Here for more about the technologies utilised by Apex.