Innovation, Fintech and the Future of Investing
As finance and technology continue to coalesce, the rise of new asset classes is set to change the industry forever.
The global reach of finance is undeniable. Around 15 billion shares of stock are traded every day, while 100 million credit card transactions occur daily. The incredible capacity of global monetary networks is only made possible by evolving, innovative technologies that connect parties around the world and create never-before-seen financial instruments.
As finance and technology continue to coalesce, the rise of new asset classes is set to change the industry forever. Not only are new alternative asset products being offered as a result of technology, the invest-tech platforms that make them possible have already altered the way ESG and impact investing is done.
Innovation across the financial sector
The extensive impacts of fintech can be felt across every financial sector. A majority of executives in the field agreed consumer banking would be the industry most likely to be upended by technology. As three out of every four Americans now use their bank’s mobile app to meet their everyday banking needs, the number of visits to physical banks has dropped 36% over the past five years. The way people pay for things has forever changed as well. Taking an interest in more convenient forms of payment, over two billion people around the world now use e-wallets while the trend of contactless payments appears to now be the preferred way of transacting.
Leveraging technology, fintech lenders now have access to data acquisition and analytic techniques that process loans in as little as 24 hours. This speed and convenience have allowed fintech companies to collectively gain a double-digit market share in the mortgage lending industry.
Investors have also begun to feel fintech’s impact. Many in wealth management are finding that technology is a necessary part of business strategy. However, with three out of every four people preferring self-servicing technology, the way people invest is currently evolving. New investors are three times more likely to rely on invest-tech mobile platforms, and millions of Americans downloaded trading mobile apps just during January 2021. Although online trading has been around since the 1980s, technology has only recently allowed investors to access different markets through improved trading infrastructures. This growth in invest-tech is democratizing and educating investors through opportunities never before thought possible.
At the core of all of these changes are digital platforms. These online all-in-one solutions have reinvented the business model by connecting customers and businesses in a digital community. Largely driven by the digital demands of the pandemic, substantially more companies are interacting with their clients online. As business activity continues to shift to these extended ecosystems, it’s estimated that 75% of businesses will leverage digital platforms and use them to adapt to new markets by 2025. This technology is especially critical to alternative investment companies striving to improve transparency, communication with clients and the way clients engage with their investments.
The rise of alternative assets
The use of technology in investing has led to incredible growth specifically in the alternative asset industry. Fractionalization — the act of taking an asset, digitally breaking it into smaller pieces and creating a virtual marketplace for those pieces — is driving accessibility across every investment asset class. Fractionalization removes the initial capital requirement barrier while simultaneously creating liquid digital markets for otherwise illiquid assets.
These fractionalized invest-tech platforms can be found across almost every alternative asset class. Investors can buy equity shares in game-worn sports memorabilia or rare baseball cards. Peer-to-peer lending platforms empower investors to secure debt investments with screened individuals. Commercial real estate, multi-family real estate and farmland crowdfunding platforms enable direct fractional ownership in land and associated operations. Using digital investment platforms, investors can lend money to small businesses, buy future music royalty rights, even invest in future hours of people’s time. If you’ve ever wanted to invest in something, chances are there’s a digital investment platform that makes that accessible.
Other technologies are further driving interest in alternatives as well. Blockchain and related distributed ledger technologies are increasing investor confidence through financial transparency, while automated technologies are substantially reducing processing time and lowering the need for reworked investment subscription requests.
Rethinking the 60/40 portfolio
A survey from CoreData found that 40% of institutional investors plan on increasing their alternative investment holdings over the next five years. Meanwhile, 59% of retail investors want to expand their portfolio from just stocks and bonds into alternatives. With industry forecasts projecting alternative assets as a $17 trillion industry by 2025, many believe the growth in alternative asset investing is just getting started.
There are several reasons ultra-high-net-worth individuals are allocating over 50% of their portfolio holdings to alternative assets. Alternative assets are typically uncorrelated to more common asset classes and provide stronger portfolio diversification. With so many investment options becoming available, there are greater opportunities to hedge against inflation. Portfolios that allocate even a small portion of their holdings to alternatives have historically generated higher portfolio returns and reduced portfolio-wide volatility.
The rise in the number of alternative investments and the accessibility to these opportunities has led many to believe traditional portfolio allocations are outdated. Accessibility might’ve made alternative investments popular, but continual strong financial performance can make alternative investments permanent in any portfolio.
Prioritizing sustainable investing
With so many new investment opportunities to choose from, investors are beginning to prioritize the non-financial matters that are most important to them — and sustainability is at the top of their list. More and more people are willing to make sacrifices for ESG as 66% of respondents around the world state they would pay more for a good knowing it was made sustainably. Meanwhile, two out of every three banking customers want to see their financial institution become more sustainable — and half of all customers are prepared to leave their bank if progress towards sustainability doesn’t happen.
Both the supply and demand for sustainable investing are incredible. Both retail investors and institutional firms are placing more emphasis on impacting investing. As a result, the amount of money invested in ESG funds more than doubled from 2019 to 2020. Between December 2020 and June 2021, almost 800 new ESG funds were created. Almost all REITS — regardless of market cap — are beginning to place a high emphasis on ESG reporting, while other real assets that prioritize sustainability are seeing growth in opportunity and demand as well.
Fintech is also driving the rise of other new, innovative investment offerings centered around sustainability. Impact token offerings are on the rise for numerous social or environmental causes. One example is a new tokenized carbon credit accessible to retail investors that leverages blockchain capabilities to track environmental impacts. Another fintech trend is direct indexing, which is the idea of replicating a fund by directly purchasing the same weight of stocks as the underlying index. By leveraging fractional shares to prioritize and customize their holdings, many investors are beginning to create their own personalized ESG-emphasized indexes.
The true necessity for these products is the current state of climate change. Global temperatures will likely rise 1.5 degrees Celsius over the next two decades, potentially causing permanent and irreversible changes to weather patterns. The United Nations has slightly fallen behind its Sustainable Development Goals by 2030, and the International Money Fund says more financing and investing in sustainability is needed. During a time when there’s more carbon dioxide in the atmosphere than at any other point while humans have walked the Earth, the intervention of technology and finance is a beacon of hope where investors can easily use fintech and digital platforms to begin impact investing.
The future of investing
A recent study found that 90% of Americans are now using some form of technology to manage a part of their personal finances. Old asset classes are being modernized while new investment vehicles are taking off. As the planet continues down a path of irreparable change, people are taking notice as more than half of investors are willing to sacrifice some portfolio return to achieve an ESG goal.
It’s now up to fintech to continue delivering accessible, innovative ways for investors to get involved in impact investing.
Related: The Growth of Sustainable Investing
Entrepreneur Leadership Network Contributor