Financial Market Infrastructure Is Being Disrupted, and Investors Better Pay Attention
Thriving financial markets rely on the existence of a well-oiled financial market infrastructure (FMI). These institutions enable financial instruments to perform and participants to trade and settle their transactions. While this infrastructure may seem like a mundane necessity, it is currently being dynamically reinvented by exciting new players who are determined to disrupt. Opportunities for direct investment access to disruptors of Financial Market infrastructure currently in the late-stage and pre-IPO stages are increasingly popping up on investors’ radar screens. Join us as we take a deeper look into the segment and its investment opportunities. As you will see, our journey will ultimately take us to Latin America, a region you may not have expected to be a driver of financial market infrastructure innovation. FMI – The “plumbing” of the financial system, and much more Financial Market Infrastructure, according to Switzerland’s financial-markets regulator FINMA, includes “stock exchanges, multilateral trading facilities, central counterparties, central securities depositories, trade repositories and payment systems”. Essentially, they are the networks that allow financial transactions to take place – the “plumbing” of the financial system – enabling the process of trading, clearing and settling transactions. How Has It Changed? The pandemic and attendant global volatility challenged many sectors, but FMIs have remained resilient, with many seeing record exchanges in 2021. However, Covid did expose a need to rethink some out-of-date operations and ways of working radically. It is clear that emerging technologies continue to change the financial landscape rapidly. As a result, Financial Market Infrastructure businesses like securities-trading venues and clearing firms face increased competition and technology innovation challenges. JP Morgan CEO Jamie Dimon recently pointed out to shareholders that banks need to act now to defend their role in the global financial system against growing competition from FinTechs and Big Tech, stating: “We cannot overemphasize the extraordinary importance of new technology in the new world. Today, all technology is built ‘cloud-enabled’, which means the applications and their associated data can run on the cloud.” FMI 2.0 – The Building Blocks Of Change Traditional systems are increasingly unfit for purpose, where complex trades are at odds with siloed infrastructure and legacy systems. In addition, Global Risk Regulator states that there can be over 50 vendors involved in processing each trade, which adds significant complexity and increases the risk of errors. Disruptive Blockchain Technology Moves Financial Market Infrastructure Towards Digitization and Transparency of Transactions In simple terms, blockchain is a digital record split into pieces or “blocks” that are stored in multiple places – sometimes called a distributed ledger or distributed database. Blockchain is best known for enabling the existence of cryptocurrency, providing a secure, irreversible, and centralized record of transactions. Blockchain aims to accurately record data in a way that is un-editable and indestructible. Blockchain technology enables FMI 2.0 firms to create more compliance-friendly, more efficient and more secure funding, operations and infrastructure for financial markets. And the most innovative firms are creating symbiotic networks or financial “ecosystems”, working together and powered by blockchain. A CHF 155 Billion Market Opportunity Switzerland’s Six Group estimates the FMI industry is worth CHF 155 billion globally, with annual growth of 5% and 3% across Europe since 2012. The processes facilitated by FMI create data and financial information. Digitization and innovative technology have opened this world, providing new platforms, trusted security and greater accuracy in a new and profitable way. BIS states that all the data in the world at the beginning of 2020 was estimated to be 44 zettabytes in terms of size. This is predicted to rise to 164 zettabytes by 2025. They describe this explosion in data as “the new oil” and investors certainly seem to have had their interest aroused. Some Of The Factors Disrupting The FMI Landscape Include: Cloud Services Financial Market Infrastructure is moving to a cloud-based model for many reasons, including cost. Minimal on-site infrastructure means a reduced capital expenditure, while the on-demand nature of the cloud-based arrangement means you have a more flexible and scalable consumption model. It also offers greater access to innovation and unprecedented speed to market. CME Group, for example, became the first derivatives exchange to provide a real-time, cloud-based market data product when it announced the launch of CME Smart Stream in 2019. Artificial Intelligence and Automation The customer experience of FMI is being completely transformed. Innovative businesses offer always-on access to customer support with digital, virtual agents available at any time and on any device. In India, YONO, designed as a one-stop solution to meet a broad range of a retail customers’ banking and nonbanking needs, is an example of how a customer’s experience can be transformed. Democratization of Data and Analytics This digital transformation has improved speed, visibility and access to data and insights. Players such as fraud.net enable businesses to tighten up audit trails, view customer behavior and track trading patterns while improving fraud surveillance and compliance. A truly personalized user experience can also be created using deeper insights and faster data access. And, of course, the digitization of FMI also delivers new and alternative streams, including the monetization of data feeds, collation of historical data, and provision of analytical models. As we virtually traveled around the world to shed light on FMI 2.0 opportunities, one region, in particular, caught our attention: Latin America. Latin America – Opportunities Of Tectonic Proportions Are Awaiting Some regions look to be especially focused in this area. For example, Latin America has seen FinTech emerging late as a trend, but it quickly began to shape financial services across the region. BIS explains that within payments and alternative finance, this trend has rapidly gained traction. It is believed that it could go some way to incorporate the “unbanked” or “underbanked” into the financial system. This could also spark improvement in the economic and social conditions of the region.
Latin America’s Exponential Growth LatAm’s later adoption of FinTech services contrasts with the explosion in investor interest in the sector. Between 2017 to 2019, BIS states that FinTech investment in LatAm grew more than 100%, while the number of deals increased by 28%. Despite being a small percentage of global volume, the market for alternative finance (e.g. fintech credit, equity crowdfunding) in LatAm has grown exponentially with an average annual growth rate of 147% for total alternative finance and 183% for fintech credit between 2013 and 2018. Venture capital investment also increased, doubling every year from 2016 and reaching $4 billion in 2019. The new blockchain-powered FMI model sees adoption in Latin American with financial institutions and FinTech firms open to “Fintegration”, as BIS calls it, with banks and FinTechs creating symbiotic relationships where they achieve scale, adhere to regulatory standards, and build their brands. One of the players to watch is Brazilian SoftBank-backed 2TM Group. At the time of writing valued at USD 2.15 billion, the firm recently raised USD 50 million for product development and expansion into Chile, Colombia, Mexico, and Argentina. If Data Is The New Oil, Latam Is Drilling Internet penetration in LatAm was 74% in 2019 (versus 59% worldwide) and users spent an average of 8 hours connected to the internet every day (versus 6 hours 43 minutes worldwide). In addition, cellphone adoption, especially smartphones, is high in this region, with half of all online spending done via cellphone. With a cloud-based, blockchain-powered revolution already underway, investors should consider how Latin America’s mature internet adoption and its burgeoning Financial Market Infrastructure will develop in the months and years to come. Contact Stableton or sign up to explore our investment opportunities In the past, accessing a high-potential segment like FMI 2.0 meant seeking early access through venture capital funds (which, once well-established, might not even be interested in your commitment). In addition, it involved high investment minimums, cumbersome paperwork, scarce information (often not even knowing what you will be investing in), and long holding periods. Today, there is an alternative. Accessing promising businesses via late-stage investment and pre-IPO investments is increasingly popular. For one, investors know the name of the company they are investing in. Secondly, as in the case of FMI 2.0 innovators, the product-market fit has already been established, and the path to profitability is clear. To hop on an investment at this stage means a lot of upside potential, while the risk level stays relatively moderate. Stableton is Switzerland’s leading provider for access to late-stage venture capital & pre-IPO Investments to smaller qualified investors. Our mission is to help investors get access to the otherwise secluded private investment market. With a minimum of CHF 10’000, this type of investing should be considered as part of a portfolio. This article only scratches the surface of the opportunities late-stage VC and pre-IPO investing present. Contact your Stableton representative now to learn more and find out about opportunities that exist right now.
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