Fintech for Private Funds - Beyond the hype
Tuesday, April 2, 2019 |
Seventeen years after the launch of Google and eight years on from the first iPhone, the social media software-as-a-service mobile ecosystem that we couldn’t live without in our personal lives, is becoming more visible in the office. KPMG (2018) reported that global fintech investment more than doubled to a new high of $57.9Bn in H1’18, in a seemingly accelerating trend, and a plethora of new payment apps promise to take on the established banks.
Beyond the hype, however, what exactly is Fintech? Why is it booming now and why should Private Equity managers pay attention?
What is it?
Fintech is the application of technology to finance, an activity begun with the abacus. Firms of all kinds have, for years, tried to apply costly, resource-hungry technologies to their back offices in order to improve efficiency and minimise risk. More recently, faster broadband and agile development have allowed cloud services to offer easier and cheaper ways to share information and automate processes by distributing their software over the web without the costs of installation and maintenance. In turn, this connectivity has allowed firms to exchange information more freely through services which are moving from being hygiene factors to becoming key success factors in areas like investor relations and CRM, cash management and marketing.
Good people are scarce. Where mechanical tasks can be automated or information shared more quickly, skilled staff can focus on applying judgement and making decisions. As populations age and governments are challenged to do more with less, technology can offer a cost-effective way to maintain services and to interact with citizens through online tax returns, benefits applications and even healthcare. Political acceptability thus matches an economic incentive and the basic familiarity that most people now have with social media and touch-screen technology. Less paper and less energy used in travel and computing power also burnish the environmental credentials of cloud providers while growing case law and government initiatives such as the Digital Catapult in the UK provide a safer framework for online commerce.
What is the outlook?
Fintech then enjoys supplies of capital, political support and eager innovators keen to solve real problems and reduce costs for firms. Too often, however, good technology is not supported by effective service. Recent AIFMD and FATCA requirements showed a disconnect between consultancies who offered advice without help to perform the more mechanical tasks and technologists who offered software without the support to embed it into processes and to understand what information actually needed to be reported. Many customers also remain concerned about the safety of data online despite the significant investment by technology firms in security measures.
It is easy to treat current opportunities as hype and to wait for others to take the risk on new technology and online services. This chicken-and-egg scenario in turn raises the capital required from new entrants to market and explain their services until they reach the tipping point where customer numbers are sufficient to offset fixed costs of software and processing power and to create an effective network amongst which information can be shared. Firms who do grasp emerging technologies, however, can significantly reduce costs, focus on their competencies and enhance their reputations as first movers in a market where judgement counts for much.
So what does this mean for Private Equity?
Many if not most functions are capable of being automated, given enough money and motivation to do so. In the public markets, investment selection, trade execution, valuation monitoring, taxation and redemption are often completely automated in an end-to-end flow. Guernsey in fact has recently recognised the legal status of computer to computer contracts without human intervention in its Electronic Agents Ordinance. Some administrators have wondered recently how much of their business will still be done by humans in 5 years time. Why should private markets remain largely based on documents, pens and spreadsheets when public markets have been so relatively automated for so long?
As ever, technology often runs ahead of human understanding and acceptance in a high value marketplace. While performance, management fees and regulatory risk remain high, technology adoption will be largely driven by improvements to client service, regulatory compliance and big data mining where profits and risk control are more immediately visible. So, beyond the potential for investment, Fintech offers Private Equity managers the chance to improve the profitability, focus and value of their own activities:
- Sharing investment and administrative information online reduces the costs of data reconciliation and of supporting software for everyone.
- Applying new software and services online is a relatively painless way to organise and control overhead costs like Compliance and Risk Management.
- One of the biggest opportunities lies in Investor Relations where the hassle factors of due diligence, periodic and tax reporting, payments queries and communications could be smoothed online.
Add to that the network effect whereby these factors are consolidated across multiple investments and the opportunity for Fintech to bring real benefits for fund managers is significant. So, beyond the hype, Fintech gives opportunities to reduce cost and risk while improving client services at a humanly-acceptable pace. We are proud at The ID Register to play a small part in helping the Private Markets become more efficient and more widely accessible.