Recent years have witnessed a proliferation of developments transforming the manner in which people invest, challenging existing paradigms within the financial services industry. As increasingly automated services and data-driven decisions enable investors to bypass intermediaries, what we see is a decrease in costs and a democratization of access that was once restricted to a select few. Below are a few trends in technology disintermediating financial services today.
Digital investment advice has become a prevalent tool among investors seeking affordable alternatives to traditional advisory services. In the past couple of years, we have seen a rise in “robo advisors” commoditizing financial advisory and providing them at a fraction of the cost of traditional firms. Algorithm-generated allocations attempt to remove human error by making the process data-driven. The efficiency in both time and cost keeps fees relatively low, providing a palatable option to investors new to financial advisory or simply not seeking personalized planning. This is reflected by the wide scale adoption of such platforms. According to a study conducted by Corporate Insight, robo-advisors directly managed $19 Bn in assets at year-end of 2014. Whether this is simply a passing trend or a true threat to traditional advisory services remains to be seen, but one thing for certain is that investing and portfolio management are two processes that are becoming increasingly automated.
2. Payment Solutions
The P2P lending industry is expanding beyond small dollar amount loans into mortgages and other classes, a practice that has traditionally been limited to banks. The lower cost structure of online originations offers attractive rates for borrowers while significantly cutting down the time it takes to get approved. A recent trend to note is that institutional investors such as asset managers, pension funds, hedge funds, and family offices are starting to dominate the industry and inject capital. Sophisticated investors are utilizing loan statistics provided by P2P lenders to develop their own credit models to select attractive loans. Availability of technology-ernabled, crowdsourced information are enhancing investment decisions.
Cryptocurrencies, such as bitcoin, also enable consumers to bypass intermediaries and avoid transaction costs associated with banks. Block chains are now displacing banks as intermediaries, decentralizing and removing the costs and inefficiencies that correspondent banks impose on cross-border transfers. Small B2B enterprises are already using these methods as a faster, cost-efficient way of collecting and sending payments across the world.
3. No Fee Stock Trading
While online stock trading is certainly not a recent trend within the financial services industry, there has been a general move towards reducing transaction and commission fees. Take Robinhood, for instance, an investing app boasting free trades and no account minimums. These companies target newer investors who have limited cash to invest and unwilling to pay brokers to place trades. Digital disintermediation once again comes into play as individuals are now able to place trades through mobile technology, all without incurring fees from online brokerages. Mobile compatibility, low costs, and ease of use are value propositions beyond the buying and selling of securities that new solutions are bringing to the forefront of stock trading.
4. Online Deal Sourcing
At the other end of the liquidity spectrum are online platforms facilitating private investment deal-sourcing. From startup to hedge fund investment opportunities, there is a plethora of platforms that facilitate access to alternative investments through digital means. The demand for these types of financial products is on the rise, yet the private capital markets are plagued by opacity and inefficiency. Given the private nature of these offerings, alternative investments are notoriously difficult to source and require investors to purchase expensive products from large wire house firms. Many platforms, such as DarcMatter, address these issues by providing low-cost, institutional-level access to alternative investment products and bypassing geographical restrictions.
Technology has had a profound effect on the financial services sector, and will continue to do so as new methods of distributing, marketing, and purchasing financial products are developed. The widespread adoption of mobile technology and automated services have already disrupted what were once “high touch” industries in the past, and the financial services sector is next in this wave of disruptions.
DarcMatter (“DM”) is a global fintech platform that streamlines the capital raising process for asset managers and provides investors with transparent and direct access to funds in the asset management industry.
DM’s mission is to enhance capital flow through fintech to create transparency and efficiency by providing direct access to funds in the Asset Management industry for Accredited Investors, Advisors, and Asset Managers.Visit DarcMatter