Fintech was a major topic at the 14th SRP Annual European Structured Products & Derivatives Conference in London last week, and SRP spoke with Matthew Van Niekerk (pictured), chief executive and founder of SettleMint, a fintech start-up developing blockchain technology, who was also a panellist at the SRP Blockchain discussion, regarding the fintech revolution and potential application of rapidly evolving technology in the structured products space.
Fintech is shaping up as the single biggest disruptor in the financial spheres that has emerged in the past few decades. Are we heading for a machine-, AI- and algorithm-driven investment world?
We are definitely headed in this direction. However, the notion of traditional players being totally disrupted is in my view overplayed. The idea that the utilisation of technologies such as machine learning, AI, algorithmic trading will spell the end of the business as we know it today is more a fantasy than it is grounded in reality. We tend to paint a David versus Goliath type picture, where either David wins or Goliath wins. However, the reality about actual implementation and adoption of these technologies will most likely not be so binary, at least not in the short term.
Why? Simply put, customers tend to be "sticky" as it is cumbersome to move accounts, and customers (especially conservative ones) tend to rely on "trusted" service providers. Another reason is that the incumbents, although they may not be as nimble or agile as a sparky startup, are also generally not asleep on the wheel. They will also adopt these technologies in their product offering, perhaps at a slower pace, but most likely at a pace that matches the adoption rate of the majority of customers. By the time the early adopters are on board with a service based on these technologies and the mass market begin looking for alternatives in financial services, the incumbents will be launching their own offering utilising these technologies. The customer is then faced with the question "do I go through the hassle of switching when my current financial service provider has (by then) a similar product offering?" For many, the answer will be no.
Blockchain has become one of the leading fintech topics, grabbing major interest from market players and regulators alike. How is blockchain technology applicable in the structured products industry?
Distributed Ledger Technology (DLT) can be utilised to create a highly efficient system for the transfer of ownership of financial assets, be they stocks, bonds, swaps or derivatives. The ability of different actors in the infrastructure to work off a shared ledger, a 'golden record' of ownership sounds subtle but the implications are anything but. The use of such a ledger promises to greatly reduce the back office costs associated with reconciliation and reporting.
A potential application of DLT in structured products is the so-called 'smart contract', which is essentially business logic captured in code. Smart contracts can be seen as a mechanism to automate great amounts of work associated with creating and trading in these products. However, to realise a significant level of automation and/or savings it would require that products are somewhat standardised. OTC products are not generally standardised so the jury is out on those.
A product that would be very interesting to see developed would be blockchain traded funds (BTFs), where the concept is essentially the same as in an exchange traded fund (ETF), but trading occurs on the blockchain platform. Over the past several years, ETFs have been eating away at the market share of mutual funds, and in the future BTFs could do the same thing to ETFs. Extend this a step further and how about a Robo-advisor based on BTFs? I don't think we are so far out from this possibility.
Why should investors, and product issuers/market makers, be excited about these innovations (smart contracts, BTFs, etc.)?
Improved accessibility, lower costs, instant settlement (vs. t+20 for some structured products) are amongst the most obvious benefits. With regards to costs, investors would be interested "if" the savings are passed on, which may or may not be the case. For issuers that get on board early, they stand to gain a substantial cost advantage and/or new product advantage over the slower adopters. They will reap the benefits and can choose whether to keep their newly greater margins to swell profits or pass on the savings to customers to gain market share by undercutting the competition.
How far away are we from operational BTFs, or others blockchain-enabled financial instruments? Has a precedent been set?
By far the most distant leader in terms of getting actual financial products on the market is US-based blockchain fintech developer t0.com. They went live with a private bond offering on the blockchain as far back as 2015! They have since introduced a product called "short token" that dramatically increases the level of transparency in the securities lending business. They are also live with pre-IPO shares and really claimed the space as the market leader in December of 2016 with the first ever issuance of shares of a publicly listed company (Overstock.com) on their blockchain solution.
So how far are we? We are already there but this does not mean mass adoption tomorrow. Adoption will start slow and gain speed gradually over time. The precedent has definitely been set, and while integration with existing legacy market infrastructure will hold back adoption initially, clever fintechs are finding novel ways to bridge the gap between the old and the new by integrating with legacy market infrastructure as a design choice from the beginning.
What are you looking forward to in terms of fintech? What should investors/issuers be looking forward to?
As a customer, I am looking forward to far better service, convenience and experience. Whether that is by switching to a fintech or by my current financial services provider doing what it takes to keep up and stay relevant. I am most excited by the convergence of a number of technologies that are really going to accelerate the rate of change at a non-linear pace. Take AI, Big Data and blockchain. These are just three of the technologies that are individually maturing and are now converging. It is this convergence that will unleash unfettered advancement. Add VR and I am sure we will have investing experiences that we can't even imagine today.
Issuers should be constantly on their toes and raise the rank of tech in their organisation. We live in an increasingly digital world so it always amazes me how resistant some organisations are to embracing technology at the most senior levels. Those that do will stay relevant, those who don't will only be able to hide behind regulations for so long with their heads in the sand. At some point (distant it may be), they will simply cease to exist as we know them today.
Which region/country is poised to lead the 'fintech revolution'? Any trends?
Europe is doing well and the US seems to lag at this moment. I would really look for some of the extremely hungry, budding Fintech cities in Asia to start pulling ahead in the next three years though. Keep an eye on both Singapore and Hong Kong. Singapore is embracing Fintech massively. The Fintech Festival last November organised by the Monetary Authority of Singapore drew over ten thousand people from all over the world. Dubai is another interesting prospect as they are pouring money into it. I expect one of these regions to "leapfrog" the more traditional Fintech hubs in the very near future.
What is the biggest challenge for firms in this segment?
One of the biggest challenges to come would be handling the so-called 'trough of disillusionment' that comes after the peak of the hype cycle in the evolution of fintech. People understand that fintech is not going to replace everything, and interest level by some will drop.
The technology is exciting, but it is extremely young, and that should not be forgotten. Awaiting the technology to mature to a sufficient level, where security, data safety, and feeling confident in putting those in an app reach sufficient level, will be one of the major challenges in the coming years.
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