Virtual Banks Could Shake Up Funds Industry – Report

Successful virtual banks are likely to branch out into wealth management services, robo-advisory and fund distribution, says a new Calastone paper.

Virtual banks may eventually break into fund distribution and reshape the industry, according to a new whitepaper from Calastone.

Currently, virtual banking is still at an embryonic stage of its life cycle, and the eight licence holders are expected to provide fairly vanilla services such as low-value retail loans,  savings, payments and card services.

To date, two virtual banks (ZA Bank, Airstar Bank) have launched full operations, while three (Mox Bank, WeLab Bank, Ping An OneConnect Bank) have launched pilot services.

If they are successful at capturing market share, virtual banks could begin offering clients wealth management services, even branching out into fund distribution, which is seen as fragmented, intermediated, expensive and highly manual.

“The process of buying funds – even through online channels — from traditional financial services providers can be quite cumbersome, mainly because there are so many options for investors to choose from and the systems at banks continue to rely on legacy technology,” says Leo Chen, Managing Director and Head of Asia at global funds network Calastone.

According to the paper, virtual banks might even incorporate robo-advisory services into their product suite in order to strengthen their investor appeal, similar to the AI-powered virtual assistants already introduced at a number of major banks.

“The reality is that the likes of Alibaba and Tencent are already distributing funds although virtual bank licenses could be a way for them to expedite the whole process,” says Ned Phillips, founder and CEO at robo-advisory software provider Bambu.

“I envisage some of the technology companies — owing to the fact they have huge amounts of data on their users — will eventually autonomously construct financial plans for customers and ask them if this is something they would like to invest in.”

Phillips also highlights that low-value fund investors who wouldn’t currently receive any attention from an independent financial advisor (IFA) could end up being served by a virtual bank.

According to Calastone’s Chen, virtual banks with a sufficiently strong client base could begin offering automated fund distribution, which he says would appeal to non-high-net-worth retail investors.

This model was pivotal to Ant Financial’s success with its Yu’e Bao money market fund, where it managed to attract retail investors — including cash poor millennials — who normally would not have invested in funds.

Meanwhile, the traditional funds industry is expected to suffer from Covid-19 in terms of performance, frustrating existing investors who have already begun to shop for deals elsewhere and in some cases invest in index trackers.

With assets and fees under pressure, asset managers need to identify cost savings and deliver operational alpha for investors, the paper says, highlighting distribution processing as one area where cost savings can be achieved.

Last year, Calastone migrated the technology behind its funds transaction network onto a distributed ledger for this exact reason – to reduce the complexity and costs associated with fund distribution.

Asset managers likewise need to invest into technology to digitalise their businesses and make the customer buying process “more enjoyable”, the paper says.

“Technology companies are going to be the future of distribution, so asset managers need to start engaging with them, while also retaining their historic distribution relationships,” says Phillips.

The full paper is available here.

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