Crowdfunding emerged a few years ago with many promises to help to raise capital for startups, make the investment market more democratic, and make the whole market more effective. It has created a new market, not only for startup funding, but for real estate and later-phase private companies. At the same time, FinTech might have an even bigger impact in other areas – not to collect money but distribute it, and then alter the whole value chain. Put simply, the entire FinTech market and its impact is much wider than the services that are visible to consumers.
Making and managing investments are the main costs for large investors. Really big investors include, for example, pension funds and sovereign wealth funds. Often they invest in other funds, because the minimum investment size they can manage cost-effectively is typically $100 million, $500 million or $1 billion. This means their return on investment depends on the returns of the funds they invest in, as well as the management fees of those funds.
This makes it hard for anyone in the investment market to systematically perform better than the market. That’s why all kinds of funds of all sizes look for solutions to make their operations more effective.
Now FinTech is starting to offer solutions for this. Robo-advisor solutions are mainly for consumer services, and most of them are still very simple and only allocate investments into a few ETFs (exchange-traded funds). At the same time, FinTech solutions, data analytics, and AI are coming to help the largest (e.g. pension) funds to make more direct smaller investments and avoid management fees. Smaller funds can then utilize the same technologies to make their own management work cheaper and lower management fees.
If we look at the total money in the finance market, new and more cost effective FinTech solutions for large investors have a larger impact than crowdfunding investments in early-phase companies, or even p2p lending. We can, of course, say that a significant part of the fund money in the end also comes from private investors (or from private pension schemes), but it will probably take much more time for FinTech to cut all components of the value chain from private investors to the ultimate investment targets.
We see similar examples in the lending market. Banks and other lenders can utilize FinTech to make much more sophisticated lending decisions, better optimize pricing of loans, follow data from borrowers and react fast to changes. The lending market has for years been dominated by price competition and securitization, but it’s safe to say now that FinTech and data can take us back to models when banks really knew and evaluated their customers because it offers a cost-effective and scalable solution to do so. It can also change the debt market – e.g. to manage risks better, rather than just “package” good and bad loans.
Investment allocation and management and lending processes are just few examples of how FinTech is changing the whole finance market to an even greater extent than FinTech-driven consumer services that now get the most of visibility (not to mention VC money).
If we really want to understand the impact and opportunities of FinTech, it is crucial to analyze all services, cost structures and value chains in the whole industry, from those stone-age expensive legacy IT systems and super high compensation models to fund managers that mainly follow simple investment rules and continue to know all available data and dependencies. We are still in the early phase of the whole FinTech journey. To move forward, we still need to carry out a lot of systematic work, not merely talk about fancy services.