What do fintech innovations mean for capital markets?

Financial technology, or fintech, is a catch-all term. It sometimes describes firms or business models such as crowd-funding, robo-advisory services, or crypto asset firms. It also refers to the technologies that improve the delivery of financial services, including cloud computing, distributed ledger technology, or artificial intelligence (AI) and machine learning (ML).

Fintech is evolving rapidly in several areas, with implications for capital markets. Here are three of them:

Gamification and consumerization of investing: Financial services firms have long recognized the power of marketing. For example, research suggests mutual fund companies with higher ratios of marketing employees enjoy higher asset growth, which is not principally driven by better investment performance. But, with the increasing prevalence and use of mobile investing apps, fintech firms are increasingly adopting gamification and sophisticated behavioral techniques, underpinned by an attractive app design, to drive revenues. Whether it is the use of free shares on brokerage sign-ups, or the use of influencers to sell financial products, many of these firms have adopted strategies successfully used by e-commerce firms.

When used well, gamification can be a powerful tool for engagement and literacy. However, this can also be leveraged by firms to drive trading, or induce investments in complex products, all at the expense of clients. Regulators must carefully consider the trade-offs between encouraging innovation and investor protection.

AI and human intelligence: For optimists, AI has the potential to upend financial services. It can deliver efficiency gains through automation, and enhance analytical techniques and investment decision making processes, providing complementary cognitive abilities alongside human intelligence (HI). But pessimists point to the gap between rhetoric and the reality. According to our 2019 global survey, over 95% of 230 portfolio managers relied on excel and three-quarters relied on desktop market data tools for their research, while only 10% used AI and ML techniques at that time (although this may have risen since ).

Still, AI is gradually transforming the investment industry. The industry is moving towards the ‘AI + HI’ model—that is, most tasks are and will remain best handled using both artificial and human intelligence where AI adoption starts with routine, rudimentary tasks such as capturing information from texts and images, and populating spreadsheet models. Analysts are then free for higher-value tasks that require more judgment. As AI becomes an integral part of such workflows, there are potential risks, ranging from lack of transparency, around how data is sourced and processed, and the limited ability to explain results, to potential for bias. The way investment firms ethically develop AI is, therefore, essential.

Smart disclosures: Retail investors are frequently encouraged to read the scheme information documents before investing. But the reason everyone struggles to consume important information is because such disclosures are unstructured, or the problem of fine print.

One of the less noticed transformations in fintech (or more accurately RegTech, or Regulatory Technology), is how data and technology is being leveraged to provide high quality information, and how technology is currently being used by investors to search and consume that information. Regulators already recognize the potential for structuring complex information and data in a standardized, machine-readable formats, and make it accessible to investors. For simplicity, let’s call it smart disclosures.

For instance, next year, the top 1,000 companies are required to report on a set of disclosures as defined by the Business Responsibility and Sustainability Reporting (BRSR) framework. These disclosures will also be provided in a simple, machine-readable format, and if made widely accessible, should allow investors and a variety of stakeholders to easily analyze how companies are managing their emissions, supply chains, etc.

Fintech is transforming the financial services landscape but innovation sometimes carries risks. As we step into the new year, this is an area worth celebrating—and scrutinizing.

Sivananth Ramachandran is director-capital markets policy, India, at CFA Institute.

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