What do fintech innovations mean for the capital markets?

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

Gamification and consumerisation of investments: Financial services firms have long recognized the power of marketing. For example, research suggests that mutual fund companies with a higher proportion of marketing staff enjoy higher asset growth, which is not primarily driven by better investment performance. However, with the increasing prevalence and use of mobile investment apps, fintech firms are increasingly adopting gamification and sophisticated behavioral techniques, underpinned by an attractive app design, to generate revenue. Whether it’s the use of free shares on brokerage registrations, 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 exploited by firms to drive trade, or induce investment in complex products, all at the expense of customers. Regulators need to carefully consider the trade-offs between encouraging innovation and investor protection.

AI and Human Intelligence: For optimists, AI has the potential to improve financial services. It can deliver efficiency gains through automation, and improve analytical techniques and investment decision-making processes, providing complementary cognitive capabilities alongside human intelligence (HI). But pessimists point to the gap between rhetoric and 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 the time (although this may have increased since).

Nevertheless, 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 fill in spreadsheet models. Analysts are then freed up for higher value tasks that require more consideration. As AI becomes an integral part of such workflows, there are potential risks, ranging from a lack of transparency around how data is collected and processed, and the limited ability to explain results, to potential biases. The way in which investment companies ethically develop AI is therefore crucial.

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

One of the less noted transformations in fintech (or more accurately RegTech, or Regulatory Technology), is how data and technology are harnessed to provide high-quality information, and how technology is currently being used by investors to seek and consume this information. Regulators already recognize the potential of structuring complex information and data into a standardized, machine-readable format and making it available to investors. For simplicity, let’s call it smart disclosures.

Next year, for example, the top 1,000 companies are required to report on a set of disclosures as defined by the Corporate Responsibility and Sustainability Reporting (BRSR) framework. These disclosures will also be provided in a simple, machine-readable format and, if made widely available, should allow investors and a range of stakeholders to easily analyze how companies manage their emissions, supply chains, etc.

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

Sivananth Ramachandran is Director of Capital Markets Policy, India, at CFA Institute.