In a year where five major financial forces are raging, it pays to know where the cryptocurrency is flowing …
What major financial trends are shaping up this year?
In South-east Asia, Decentralized finance (DeFi) is gaining momentum. From trading to borrowing and lending, services that were once the sole realm of investors and their financial institutions are now being created as DeFi projects, powered by smart contracts on blockchains.
But DeFi is not just about disruptive technology. Its projects are supported outside the traditional financial services and fintech support structure. The balance of economic power has shifted away from centralized institutions to the participants in the network.
Investors control the funds in their digital wallets, and other participants get financially rewarded for funding these new financial services for investors, playing new roles such as ‘crypto miner’, ‘proof of stake validator’, or ‘liquidity provider’.
Elsewhere, four other trends in financial services are being watched intensely …
- Growing institutional interest in crypto & digital assets
The traditional institutional financial industry is not necessarily ready to support all of the latest and greatest advances in crypto and digital investments. There is still a lot of uncertainty around custody, regulation and technology, and how these factors plug into traditional financial institutions’ operations and technology platforms.
For example, although retail investors can easily trade crypto or non-fungible tokens through crypto exchanges, institutional investors have a number of other considerations that make crypto investing more complex, including KYC/AML and best execution. Then they have to integrate all of the post-trade transaction and lifecycle data into their traditional books and records platforms and ensure the data is kept in sync with their digital asset wallet technology or custodians.
Despite the complexity, nearly a quarter of corporations surveyed by FIS indicated that they intended to invest in blockchain or digital currencies this year. As more investors look to add crypto to their portfolios and more corporations add it to their balance sheets, more mainstream technology and services platforms will spring up to support this infrastructure.
- Digital data delivery
Staying on the same theme, one of the biggest challenges facing the industry is the reporting on different asset class investments, especially with new asset classes like crypto.
The end investor typically wants to see all investment data in one place. Frictionless platforms, APIs and AI can synthesize the data to make it presentable and useful to that investor across their entire portfolio. This ensures that risks are being diversified and managed holistically.
As digital assets like crypto move into the mainstream to form 5–10% of investor portfolios, this consolidated reporting will be critically important.
- Ever-expanding regulatory mandates
The global RegTech market has been forecast to grow from US$6.3bn in 2020 to US$16.0bn by 2025, a rate of over 20% per year, with the Asia Pacific region expected to have the highest growth rate over the period.
The biggest regulatory challenges today are around new and enhanced surveillance, oversight and regulations around the data flow. There will be greater enforcement of existing data security, risk and AML regulations, as well as expanding requirements for behavioral surveillance (such as electronics communications) and ESG-related mandates.
The digital asset explosion brings its own challenges as regulators attempt to enforce existing rules such as KYC, AML and trade surveillance to a new technology stack and market dynamics, as well as digital-specific mandates such as the FATF Travel Rule. However, there are also interesting opportunities. For instance, when it comes to regulatory reporting, authorities across the globe are shifting to demand more granular, real-time information, and towards a pull rather a push model. This means the industry can gain efficiencies by shifting from mechanical report production to cloud-based information management tools.
- Evolving lending ecosystems
Lending is not just evolving quickly, it is transforming in multiple dimensions, from each tier of the market, to origination and servicing, and across multiple loan types.
For example, a shift of financing to the point of sale with Buy Now, Pay Later is changing the balance in consumer lending. Small- and medium-sized enterprise lenders are streamlining and automating cash advance, while lending origination marketplaces are giving small businesses a wider range of lenders. For complex commercial loans, machine learning is fine-tuning banks’ abilities to determine what loan products to offer, streamlining origination and improving their view of credit risk.
There are also regional variations: for instance, the lines between commercial, small business and consumer lending origination are blurring everywhere but especially in Asia, where the market increasingly prefers to use a single origination solution for all three types of loans.
Additionally, crypto-backed loans are an easy way for mainstream banks to enter the market, and from there they can move to crypto-denominated loans.
In the commercial space, we are starting to see the first DeFi-syndicated loans, which use the traditional syndication structure to package DeFi assets. That will be worth watching in 2022.
Finally, consumer expectations for easy and instantaneous online transactions will pervade the complex, traditionally high-touch lending world. This trend has been developing over the last few years and it will remain important in 2022.
Change continues to accelerate. In a world that is driven by DeFi and enhanced technologies coupled to a data-hungry community with sensitivity to ESG—it will be important to cut through the ‘noise’ in order to create a smoother and smarter world.