The possibility of a firm like Amazon arriving in the funds market is seen by many as an ever-present threat. Nicholas Pratt takes the pulses of some of those who may, or may not, worry about it.
A recent report from rating agency Moody’s Investor Services (‘Financial Institutions - Global: Threat of big tech disruption is real’) suggested big tech firms such as Apple, Amazon, Facebook and Google are very real threats to retail financial services.
So far, Europe’s institutional-focused asset managers have remained safe. In addition, no big tech firm has yet sought or been granted a banking licence and the market sense is that they are likely to avoid manufacturing financial products due to the regulatory burdens. But, states Moody’s, big tech will “continue to expand in the distribution and inclusion of financial services in their ecosystems”.
For the funds industry, the most credible threat of big tech disruption remains the arrival of Amazon in the funds distribution process. A popular question at asset management conferences been about when and if the top internet companies will deploy their power in the fund market.
The argument that the likes of Amazon could be the most potent force, as opposed to fintech-style start-ups, gained credibility since Alibaba’s Yu’e Bao became the largest money market fund in the world, according to Jeremy Fawcett, founder of distribution research firm Platforum.
But the European funds market is different to both the US, which has a strong retail market, and to Asia, where e-commerce is so dominant. “In Europe, Amazon’s success will depend on what it can bring to the party,” says Fawcett. “Good digital engagement is always nice but if it’s aimed at mopping up the discretionary savings of millennials, it will find a limited market.”
If Amazon can use its distribution capability to reduce the cost of investing to the end-consumer, then it could be successful, says Fawcett. And its brand would work for a vertically integrated structure covering manufacturing, distribution and online account management.
However, he adds, investing is less transactional than retailing and this may well stifle Amazon’s efficiencies. “The products are unpredictable in terms of performance and it is a highly regulated market where customer service is difficult to automate and consumers often need guidance and advice.”
For incumbents interested in what Amazon is planning to do and how, rehashed robo-advice with massive distribution and good user experience would be a threat but not necessarily a game-changer, he says.
“What the industry will worry about is if someone can reduce the cost of investing to the average investor and how that will squeeze their bit of the value chain.”
Others in the fund distribution market believe the arrival of Amazon would change the game, not least because they have so many attributes that are rarely found in the funds industry. “The big tech firms thrive on innovation,” says Edward Glyn, head of global markets at funds transaction network Calastone. “They are not just looking to understand what their clients want now, but what they will want in five or ten years’ time.”
They are also equipped with superior management information and predictive analytics that give them greater understanding of each client’s profitability and spending patterns, which together can lead to a good client experience, says Glyn. And then there is the ruthless efficiency of their supply chain management.
Arguably, this is in sharp contrast to the current distribution process, which – at worst - in many markets is rife with inefficiency and poorer outcomes. But can the market’s incumbents adequately address these issues before big tech makes its push? “It is a binary situation, in my opinion,” says Glyn. “Those that don’t adapt will die and those that do will thrive.”
Some asset servicers share these concerns as well as admiration for Amazon’s experimental ethos and allowance for failure. Amazon’s €20 billion annual technology budget is at least five times bigger than the largest asset servicers’ tech spending.
Most importantly, says Ileana Sodani, a regional head business development at asset servicer BNY Mellon, the big tech firms are also highly focused on the end-client and their experience, which has earned them an enviable element of trust among consumers. “We [the banking sector] have to start thinking about the client experience more,” says Sodani. “If the big tech firms are planning for five to ten years in the future, we have to plan for 20 years ahead and work our way backwards.”
The asset servicing companies will also have to attract a different kind of talent, she adds, and think more about the changing client base in asset management and the influence of the millennials, even in the institutional world. “The institution is dealing with a client at the end of it all, so you have to deal with millennials at some point.”
So far, regulation has been viewed as the biggest barrier to the entry of big tech firms in that it might inhibit their spirit of innovation (in comparison with other markets with less burdensome regulation, which may be more attractive). “A lot will depend on how regulators look at Amazon and whether they decide that it is manufacturing financial products or providing financial advice as opposed to being merely a means of distribution,” says Sodani.
However, Calastone’s Glyn does not believe regulation will be an impediment because both regulators and big tech firms are primarily focused on improving the experience and outcomes for the end investor. Furthermore, he says, the emergence of distributed ledger technology will lead to the adoption of radically new business models that the regulatory framework is designed to support.
This is especially the case in developed markets but also in developing markets where there is untapped wealth and a focus on growing savings. “This democratisation can unlock that market,” says Glyn.
A greater obstacle may be the difficulty in building an end-to-end vertical distribution process, he suggests. Consequently, a big tech firm could provide technology, an access portal and its client base to an existing provider or else acquire that provider.
Amazon may not stop at fund distribution. Its focus on supply chain management could see the firm take an interest in asset servicing, says Glyn. “From inception, they have always been fulfilment shops and therefore specialise in supply chain optimisation. Ultimately, we will get to a situation where the big tech firms either outsource the back-office aspects to an asset servicer or decide to do it themselves. Of course, they also have the balance sheet and advanced risk tools to look at the custody space, too.”
It is not just asset servicers that are under threat, says Sodani. Fund platforms and investment advisers could also find themselves sidelined by big tech. Consequently, there is likely to be more M&A activity between existing players, as well as between tech-focused new entrants.
This has been seen already in the funds market. Deals in 2018 between asset servicers and front-office software firms included State Street and Charles River, SS&C and Eze Software, and Ion Investment Group and Fidessa.
There is undoubtedly a greater focus on data, front offices, open architecture and employing fintech firms with more agility. There is also experimentation with blockchain.
For incumbent firms, changing old technology “takes too long”, says Sodani, which in turn drives the need for partnerships.
Threshold to change
Not all asset servicers foresee an imminent threat of disruption from big tech firms. “I am not sure if the funds distribution market is a priority for them right now,” says Matthew Davey, head of business solutions at Societe Generale Security Services (SGSS). “A lot of big tech firms are focused on cloud computing – it is still the most disruptive technology out there and the greatest enabler of digital transformation.”
Some existing players are using new technology to re-engineer processes, says Davey, adding that SGSS is investigating distributed ledger technology. Prominent blockchain projects in asset management include Luxembourg-based FundsDLT, LiquidShare and IZNES in France.
But the enormity of changing deeply embedded processes in a market like the funds industry should not be underestimated, says Davey. “It is not a complex industry but it is complicated by the number of intermediaries in the chain, so there is a high threshold to change and I don’t think we would see change to every element.”
Davey does agree that partnerships and collaboration will be crucial. “All of the initiatives that we are involved in need several players to be effective and you need the business skills to define the business requirements – for example, an asset manager with an asset servicer and a blockchain start-up.”
A clear cultural difference exists between the big tech firms, working to the principle of ‘move fast and break things’, and a bank culture where failures may bring the threat of systemic risk, he adds. “The challenge is to align the cultures. Partnering could be one way to address that.”
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