Make or break time


By Goh Thean Eu

Asset managers increasingly jumping on the fintech bandwagon

Over recent years, many start-ups have disrupted traditional brick and mortar companies and industries. They include companies like Uber, which played havoc with the taxi industry, and Airbnb, which unsettled the hospitality industry.

The financial services industry has not been spared from such disruption, thanks to the emergence of financial technology (fintech) start-ups. Banks and insurance companies, once seen as untouchable due to their huge capital structures, are feeling the impact of these start-ups.

On the surface, it appears that the fintech players are having a greater impact on the consumer-facing retail banking and insurance industries. But in actual fact, the fintech disruption is happening in all verticals, and asset managers know they need to react fast.

Disrupted again

The asset management industry is no stranger to disruption. During the 1980s, the emergence of online brokerages and discount brokers significantly changed the way full service brokers charge customers, moving from fees per trade to a fee per asset under management.

Thereafter, the entry of new investment products such as exchange-traded funds put even greater pressure on fund managers and active investment strategies to outperform.

Today, thanks to the growing number of fintech companies, asset management companies are seeing disruption happening to all stakeholders, from financial planners and financial advisers, to fund managers.

For example, Boston-based Blueleaf Wealth Inc offers solutions to help financial planners become more efficient. Virginia-based Wealthminder offers a cloud-based solution to help financial advisers create financial plans, deliver recommendations, track progress, and automate follow-ups. New York-based Betterment offers automated investing services to fund managers and investors. In addition, there are digital platforms and fund supermarkets that have changed the way funds are being distributed today.

It is also understandable why there is an increasing number of fintech players penetrating the asset management industry. According to a report by PricewaterhouseCoopers, global assets under management are expected to reach more than US$100 trillion by 2020, from about $71 trillion as at end-2016.

“Fintech companies have impacted nearly every aspect of the asset management industry’s value chain, addressing both client-facing issues as well as operational efficiencies,” Ali Merji, research director at international market research firm Gartner, says in an interview with Asia Asset Management (AAM).

“The proliferation of fintech companies provides investment services firms with a broad variety of capabilities, allowing them to acquire, incubate and partner to rapidly deploy new offerings, as well as to identify new revenue opportunities.”

Asset managers and fintech

Although asset management companies understand the importance of technology and the impact of the fintech revolution, they are at different stages of adopting the technology.

Some of the technologies – such as robo-advisory, automation, and artificial intelligence (AI) – are playing an increasingly important role in the industry

Chicago-based asset management and asset services firm Northern Trust is among the big believers in these emerging technologies. According to Caroline Higgins, Northern Trust Asia’s head of global fund services, the company is exploring different technologies to see how they can be applied to day-to-day operations.

The technologies and solutions that Ms. Higgins and her team are looking at include robotic process automation, natural language processing, machine learning, chatbots, as well as conversational user interfaces.

“We are at various stages of exploring these and other technologies. For example, we have completed proof of value (POV) exercises that identified more than 50 types of reconciliation exceptions that could be automated – and we have developed an Automation Competency Centre charged with facilitating the practical deployment of robotics across the enterprise,” Ms. Higgins says.

“While the specifics are still being researched, there is one certainty: these new technologies will continue to change both market practices and how people and financial services companies interact in Asia and globally.”

Malaysia-based Affin Hwang Asset Management is also taking the fintech revolution seriously. While the company has begun adopting new technologies in recent years, they are mainly back-end applications.

“Fintech is something that we are looking very closely into. We have set up a team to look at how we can better leverage various fintech solutions to give our clients a better experience,” Chan Ai Mei, the company’s chief marketing and distribution officer, tells AAM.

Growing Asian demand

From a technology service provider’s perspective, it appears there is a growing demand for fintech solutions in Asia.

“In Asia, we have seen increased interest in our technology enabled solutions that underpin the entire transaction life cycle,” Guy Rowcliffe, head of Asia Pacific for NEX Optimisation, tells AAM. NEX Optimisation is a division of London-based technology firm NEX Group Plc.

Using NEX Optimisation’s suite of solutions, its clients, including fund managers, hedge funds, and brokers, will be able to make better investment decisions and provide better customer experience. For example, users will be able to have a holistic and real-time view of their clients in one dashboard. There are also solutions that help asset managers to generate higher revenue, manage their liquidity, monitor risks, reduce costs, and more.

“As local regulators continue to evolve their individual regulatory frameworks to conform with various international standards, we are in a unique position to engage regional players on the value of having one point of access to all of their data, optimising operational and financial resources in real-time,” Mr. Rowcliffe says.

While Asia seems to be a growth driver for NEX Optimisation’s business, the vast majority – about 1,800 – of the company’s employees are from the US and Europe, and just over 140 are based in Asia.

“That head count and the interpretation doesn’t allow for the fact that a significant part of that global head count is IT development staff and that is all non-Asia based, so the simple headcount numbers do not reflect such an extreme skew as interpreted by the 1,800 employees in US/EMEA versus 143 employees in Asia,” Mr. Rowcliffe explains.

“It is not reflective of a difference in tech adoption between regions. However, Asia does represent a priority growth opportunity for us as a region.”

Nevertheless, he says the company has increased its headcount for Asia, and plans to continue to do so when its business grows.

Fintech journey

Like an iPhone user who downloads the latest operating system and discovers it significantly affects the performance of some of the applications, technology adoption can sometimes be painful for asset management firms.

“Adoption by investment services firms has been predictably slow due to overall readiness of the industry that is hindered by legacy infrastructure, cultural barriers, and regulatory constraints,” according to Mr. Merji.

While the journey can be bumpy, industry players agree that it is one they must all embark on. The good news is that, with the increasing number of fintech players, asset managers can leverage on their strengths to serve customers better.

“Our view is that smart fintech firms are moving faster and with more agility. The days of debating between build it in-house (or) buying it from outside are effectively over. Today you can access a breadth of services at a fraction of the cost to build or maintain on your own,” says Mr. Rowcliffe.

“Plus, the new technology coming out in the market today is leading edge, addressing even the most difficult challenges such as data/cyber security.”

Mr. Rowcliffe expects more financial service providers and corporates to invest in new technology through venture capital or incubation.

“I believe that cloud will become more heavily adopted in the future, while artificial intelligence, predictive analytics and big data will continue to play a major role and be key areas of focus for buy-side institutions,” he says.

For Northern Trust, the fintech journey involves strengthening its in-house talent, as well as partnerships with various parties, according to Ms. Higgins.

“For years, the pace of change in financial services was of a level that meant companies could invest and build proprietary offerings using in-house talent. That is no longer the case,” she says.

“The talent, time and money needed to create ‘game changing’ technologies like artificial intelligence and Blockchain cannot be done exclusively in-house. To optimise innovation, financial services firms must integrate external expertise into our process.”

Ms. Higgins says Northern Trust is also leveraging on its private equity arm, 50 South Capital, to engage with promising start-ups.

“Our IT and private equity experts visit firms looking for capital and we get a look at the latest technologies more efficiently than building a lab and inventing it ourselves,” she adds.

Blockchain prospects

There has been increased discussion about the application of Blockchain technology, one of the core technologies supporting crypto currencies such as Bitcoin and Ethereum.

Although Bitcoin prices have skyrocketed from $1 to over $5,000 over the past few years, most people in the investment industry still perceive crypto currencies to be a speculative form of investment.

With the increasing number of merchants and retailers accepting Bitcoin as payment, will it mean that Blockchain technology will one day be widely used in the asset management industry? That perhaps fund managers will one day buy and sell equities and bonds using crypto currencies?

In theory, Blockchain is beneficial to the asset management and financial industry as the technology has the ability “to build trust and increase decentralisation”, which in turn, will help increase transparency and save costs, says Mr. Merji.

Using Blockchain, which is a form of distributed ledger technology (DLT), one would be able to create a tamper-proof log of sensitive transactions, from international money transfers to shareholder records.

But Mr. Merji believes it will be some time before Blockchain technology can create a major impact on the fund management industry.

“Blockchain technology has the potential to be disruptive and transformational for the fund management industry but not before 2022,” he says.

According to Mr. Merji, organisations would first need to “reimagine business processes and business models”, and understand how the decentralisation of the financial system fits in their business models.

“These organisations would then need to clearly define why Blockchain is the best solution and how it will help,” he says. “We expect Blockchain adoption to take time, over five to 15 years, until [it is] truly mature and productive.”