The Future of Finance

The 4th Industrial Revolution began years ago and is now unfolding at full speed. Critically, tech is no longer a sector, it is an asset one cannot afford to live without. Tech is the new market economy altogether. We did not need COVID to know that e-commerce is the future, that businesses and consumers are embracing digital as the new normal, entrenching it in their respective spending, borrowing and investing habits. Consequentially, entire sectors are suddenly obsolete and in need of a complete overhaul: Banking and Insurance, Asset Management, Utilities, Energy, Transportation… to name a few.

The existential crisis of the market economy as we know it will likely be settled in the coming years. Hopes of a reversion to the pre-GFC mean will likely be shattered for good. Traditional commercial banks will likely no longer classify as private sector entities, but rather as extensions of central banks, non-profit(able) actors whose purpose is to ensure the financial stability of their respective monetary ecosystems. In further consolidation, at the top of the food-chain there will likely be only three central banks that truly matter and need coordinating: the Federal Reserve, the European Central Bank and the People’s Bank of China.

The new fabric of the future market economy has started to emerge and new capital markets are in prime position for this change, with equities and bonds having to vacate their place and “60/40 portfolios” ceasing to represent a stable source of return.

Our vision of the Digital Future consists of two main pillars:

Fintech Lending: Fintech-powered New Capital Markets, Fintech Platforms, Marketplace Lending, Embedded Finance => The Platform Economy

Digital Assets: New Currencies & Ecosystems as entirely new financial rails, Blockchain, Decentralised Finance, NFTs, Web 3.0 => Community-Owned Economies

These two worlds will eventually coexist and collide/merge. Portfolios that aim to be resilient and stable should be careful not to exclude either of the two.

As banks recede from the marketplace, institutional investors have both the need and the opportunity to fill the gap in the real economy, through the alternatives that Fintech allows for, in so doing helping real SMEs and real Consumers, thus achieving Impact. Data-driven open ecosystems (platforms) substitute rigid top-down centralised structures (banks) in providing funding to the real economy of both unbanked/underbanked businesses and consumers. For more than a decade now, banks have been pulling up the drawbridges to SMEs and Consumers in need of working capital financing solutions at scale and retrenching to only their largest customers. This is a consequence of regulatory capital requirements that followed the GFC and their inability to upgrade their IT infrastructure, so to automatise and become more cost-effective.

However, we are not just experiencing a substitution of the role traditionally performed by banks. We are also witnessing a complete overhaul of the product suites typical of retail / commercial banking, driven by access to new sources of data in real time. Once again, technology is the lever, enabling the emergence of novel forms of risk underwriting. In addition, being more agile allows digital lenders to offer products tailored to specific sectors and needs. Revenue-Based Financing is a clear example of these forces at play: a dedicated offering crafted for e-commerce borrowers and new sources of data (e-commerce sales and advertising efficiency data) used to underwrite risk in real time.

Corollary to this is the emergence of Embedded Finance, whose purpose is to enable businesses to manage and sell innovative financial services, seamlessly integrating creative forms of payment, debit, credit, insurance or even investment into their end user experiences. Early examples of Embedded Finance include marketplaces expanding their product offering from a mere connection of the actors involved, to new financial products that help both buyers (e.g. Buy Now Pay Later) and sellers (e.g. Invoice Discounting, Credit Lines). In the future, we will gradually see an increasing number of businesses leveraging the opportunity to distribute financial products to reduce transaction frictions and obtain new sources of income.

Further, tokenisation on the blockchain allows for the conversion of assets into tokens. A major shift will take place from Centralised Finance (CeFi) to Decentralised Finance (DeFi). CeFi is traditional middle-man orchestrated finance; DeFi is a world where financial actors interact directly under the overarching rules of cryptographically enforced computer software. While we are still in the infancy of this movement, certain benefits can already be seen in action, with the ability to operate on an instant settlement basis (a feat that has never been achieved at scale in the history of finance) and with a level of certainty and transparency that only Distributed Ledger Technology can guarantee.

All in all, as Fintech Platforms, Embedded Finance, Blockchain/DeFi arise and evolve, the liquidity gap between public and (new) private markets will continue to shrink, gaining the attention of institutional players in the process.

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Disclaimer

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