The financial services industry is slow to change. The high stakes inherent in the management of money, including the ever-present risk of decreased assets, has stilted the willingness to think outside the box in other areas. In addition, we cannot discount the fact that government regulation makes it difficult for financial services to innovate. We have covered fintech in previous blog posts, here and here. Yet, the impact of fintech has many in the industry taking notice and we need to continue the discussion. Some believe fintech has the ability to disrupt the industry in the form of robo advisors and lower-cost investment alternatives. However, there are opportunities in fintech for asset managers, including risk-management platforms and data aggregators.
Financial technology venture capital has exploded in the last couple of years. CB Insights found that $10.5 billion was invested in fintech companies in the first nine months of 2015 while a mere $5 billion was invested in all of 2014. Yet, 1/3 of asset and wealth managers don’t engage with fintech companies at all. With public dissatisfaction stemming from the 2008 financial crisis and highly-paid executives, the industry is ripe for disruption.
Harvard Business School professor Clayton Christensen, an expert on disruptive innovation says that “incumbents [such as asset managers] have a blind spot toward disruption. It’s difficult to see because it goes against a set of ingrained assumptions that most likely have led to success so far. As a result, the big profitable players have a hard time seeing threats, especially from smaller, more innovative players…change is happening so fast that the disruptors are in danger of being disrupted.”
The major threat of disruption to financial services is the democratization that technology offers. Fintech companies create low-cost platforms that allow the underserved retail market access to previously inaccessible products and services. This can take the form of both robo advisors and crowdfunding sites.
For example, start-ups like the Norwegian-based Huddlestock will aim to provide individual investors the opportunity to invest in “ideas” as opposed to a strategy or individual stock. Investors would not pay any fees unless they earned money, and it would be a percentage of the profit.
While disruption is likely to occur, fintech also offers benefits to the financial services industry. Managing risk is one of the central tenets of most investment managers and technology has the potential to help better identify and mitigate those risks. For example, BlackRock’s Aladdin aggregates risk management, trading, operations, compliance, and corporate oversight into one platform. Putting these processes and the data they produce in one place streamlines asset management, allowing for quicker identification of problems and efficiency.
Fintech companies are targeting data management. If knowledge is power, data is the tool that financial firms can use to evaluate existing products and services, while tracking trends to create new ones. Firms like Novus offer reporting on risk analytics, portfolio data, and even research. Just like with Aladdin, these are not ground-breaking concepts but the level of detail and the aggregation of both data and processes will allow managers to get more information in less time.
Fintech is a broad industry and will affect many segments of the financial services industry. I have touched on just a few areas of interest and I plan to revisit this topic in 2017, surely an interesting year on many fronts.