Retail Trading Ripe for Fintech Disruption

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Start-ups in the capital market space are a small part of the Fintech world, but are finding multiple opportunities to disrupt retail trading.

Warren Lee, Fintech Strategist, DBS Bank (INSEAD M.Fin), Theodoros Evgeniou, INSEAD Professor of Decision Sciences and Technology Management

There are currently around 8,000 Fintech start-ups globally, revolutionising lending, retail banking and bookkeeping. But less than 10 percent are in the capital markets space and an even smaller segment in retail trading. They also receive a disproportionately small amount of funding, roughly 4 percent of the $96 billion of venture capital funding.

Despite being a small segment at present, retail trading Fintech firms are rising fast and are likely to accelerate a rush of entrants into the space, according to our report, Fintech and The Disruption of Retail Trading: Trends and Case Studies. Based on an analysis of disruptive Fintech firms and interviews with Fintech start-ups and subject matter experts, we found multiple drivers that present huge opportunities for these players.

Firstly, the growing sophistication of big data and visualisation tools is helping consumers to monitor and source deals online, easily access data and trends through AI and machine learning tools and access real time dashboards that track their wealth. Therefore, they are demanding online platforms to source trading strategies, help them analyse potential trading opportunities and execute trades at low cost.

Secondly, major changes in pension schemes around the world, such as shifts from defined benefits to defined contributions, puts more investment capital in the hands of retail investors who need to balance short term with long term investing.

Thirdly, regulatory changes, such as PSD2 in Europe, enable both consumers and businesses to use third party providers to manage their money. The monopoly banks have traditionally held on their customer account information and payment services is disappearing. This opens the way for these parties to build financial services on top of banks’ infrastructure.

Fintechs to watch

In our report, we identified Fintech firms we believe are exhibiting disruptive potential by attracting new target segments through better user experiences and interfaces, leveraging cutting edge technology and democratising trading tools.

There are several types of Fintech firm that embody these traits fall into the following categories.

Robo-advisors 1.0: These firms rely on user-friendly platforms to create smooth experiences, attracting millennials who don’t have experience trading in capital markets. They keep costs low by offering algorithm-based advice and invest in passively managed ETFs or stock indicies. Some even offer zero cost brokerage fees and profit instead by charging interest on margin trading.

8 Securities, for example, is Asia’s first $0 commission robo-advisor service. Their target user is 37 years old, has US$100,000 in assets and wants to allocate 75 percent to the market with 25 percent in cash. 90 percent of their users are passive investors and use their robo-advisor enabled app. The company currently has $1 billion in turnover and is used in 60 countries.

Robo-advisors 2.0 enable more sophisticated trading strategies and analytics, such as alpha generation/smart beta strategies, algorithmic strategies and analytic capabilities. They are also able to charge higher management fees than their 1.0 counterparts.

Alpha Architect, for example, provides active management suggestions similar to traditional asset managers. Their revenue model is an advisory one, charging 25 basis points on assets under management.

Robo-advisors-as-a-service offer white label solutions to financial institutions, which integrate them as extensions of existing CRM tools. Bambu, for example, is a B2B robo-advisor service providing white label solutions to financial institutions. It does goal-based investing and signed a proof of concept with Standard Chartered Bank in April this year.

Market Intelligence. These are social platforms that enable traders to interact and share trading strategies and trading algorithms. Fintechs such as Call Levels and AlgoMerchant, for example, use technology to help retail investors uncover trading opportunities based on technical and fundamental analysis. Call levels partnered with Singapore bank DBS’s trading platform, DBS Vickers, in 2016 to provide market monitoring services to investors.

Portfolio analytics/monitoring: Start-ups in this space provide advanced analytics and monitoring to retail traders. Mesitis, for example, provides B2B2C client portfolio reporting and analytical solutions to family officers and wealth managers. Mesitis has formed a partnership with Credit Suisse.

Where retail Fintech is heading

As our report shows, Fintechs are operating along various dimensions of retail investing. Some are largely independent, offering end-to-end onboarding and trading services, while some are focused on the user experience, operating on a partnership level with banks and financial institutions. While regulations can create barriers, they can also create regulatory arbitrage opportunities or open new ground for Fintechs to play on.

We also believe that we will see more developments fueled by technology. Similar to how YouTube recommends your next video and Amazon recommends your next purchase, Fintechs could eventually optimise their recommendation engines to tailor trades to optimise your portfolio. Similarly, since Robo-advisors gather a wealth of trading data, in the future they may be able to monetise this data as a revenue stream by offering market intelligence. Further, since access is becoming exponentially easier, it is growing increasingly likely that investors will use several robo-advisors to manage their money, like they use several bank accounts today. This will present opportunities for multiple robo-advisors with different value propositions to offer thematic investment strategies or goal-based savings or even aggregate and monitor one’s investments.

Warren Lee is a Fintech Strategist at DBS Bank and a graduate of INSEAD’s Executive Master in Finance. Theos Evgeniou is a Professor of Decision Sciences and Technology Management at INSEAD and is the Academic Director of INSEAD eLab.