Capital Market Trends

Each year, economists and finance industry thought leaders propose top trends expected to unfold in capital markets. In this space too, 2020 has been a watershed year that has implications far beyond the annual time frame.

Capital markets of the future will be digital.

While some form of technological intervention has always been around, more and more, intelligent automation is changing the landscape for many businesses and capital market firms are no different. Already firms have embraced en masse the adoption of digital finance mechanisms having leveraged services like internet banking, mobile, contactless payments and mechanisms for financial inclusion, globalisation and wider internet accessibility. Developments extend from internal, core functions and processes to market-facing customer engagement and service options.

Firms have invested lots of time, effort as well as money into automating all-important trade processes to standardise and simplify these, and focus on trade exceptions. These efforts are all with a view to mitigating risk without diminishing returns. Intelligent solutions such as, computer programme or transaction protocols like smart contracts, boost efficiency in trade settlements and post-trade activities by automatically executing, controlling and documenting legally relevant events and actions according to the terms of a contract.

The speed and efficiency are unparalleled. And we can expect to see these developments evolve even more. Robotic process automation (RPA), for example, has been around for some time and has already further evolved to more intelligent automation making use of AI and machine learning (ML) to optimise operations. Some big names in money management on Wall Street have thus far reported a reduction in their workforce in favour of AI counterparts. We would not be remiss to think that more such occurrences can be expected. Though arguably having received excessive hype, blockchain still provides the fundamental underlying technology that will facilitate the advancement of capital markets. Merging the ‘old’ with the ‘new’, digitising securities, for example, facilitates cost saving and risk reduction while creating economic value – all of which is enabled by blockchain.

The revolutionary power of the technology, such as the progress of 5G, is set to have further disruptive potential, though pundits do not expect implementation to happen overnight, rather, incremental change is envisioned. The opportunity for new efficiency, security and lower cost ways for capital transfer in the financial system are undeniable with even more market efficiencies in supply chain management and settlements forecast. Market developments and the impact of COVID-19 is likely to accelerate the digitalisation of currencies, markets and societies at large.

Assets
There’s overwhelming consensus that, in the financial industry, digital transformation is rapidly progressing in both the infrastructure as well as assets fields. We’ve already seen digital assets adopted by traditional finance. In the past, these ‘digital assets’ were relevant to those in the marketing field being defined as multimedia files and documents. The evolution of financial digital assets spells the first new asset class in 30 years in the industry, and has, quite literally, hit the market with force since 2008.

More commonly, we’ve seen the rapid change to digital assets in the form of cryptocurrency. With the 2009 bitcoin launch, a new era of blockchain technology and digital currencies was kicked-off. Earlier this year, despite COVID-19 impacts, all bitcoins held were worth more than USD160 billion. In future, more advancements will spell a broader understanding of digital assets in the financial space. Advancing fintech businesses and tools are ensuring that what started as an immature, somewhat informal market, is quickly progressing into one with maturity, stability and clout. As the digital assets landscape matures, it can be expected that resultant investment will follow with not just individual and business interest, but institutional investment too.

Regulation
Regulatory action is growing in the industry posing some challenges for capital market firms. The rule book of regulation is, indeed, vital for ‘new’ assets to develop and mature, as well as to foster stability and trust. Already, regulation has paved the way for a broader range of investors. The task before policymakers requires broad consideration to the use of technology in markets and guidance thereof, and it doesn’t stop there. Of course, this is no easy feat what with rapid evolution and change, necessitating that regulation further develop and evolve over time too. Globalisation further raises questions about the cross-border applicability of such regulation. Regulators are grappling with how to deal with new threats that are emerging in an ever-changing world and are compelled to respond with new regulation to protect customers and the market itself.

These realities have created a conundrum and the need for dynamic regulation resulting in frequent regulatory change. The onus then befalls firms to assimilate changing regulation into their ecosystem of applications and implement changes as needed, all the while, avoiding costly operational interruption, or worse, shutdown.

The rapid evolution of software-based financial services is remaking the banking industry, and, similarly, the regulatory, compliance and assurance space that governs them. Enter RegTechs, that allow regulatory processes to be managed through technological means, firmly rooted in the software-as-a-service (SaaS) space. In this context, firms would do well to modernise their risk and compliance functions, while some regulators have started to do the same with their own systems and processes in order to be future-fit.

Customer Behaviour Demand
COVID-19 ensured that even the most tech averse consumer was propelled into digital adoption in some form or other in order to adapt to lockdown restrictions in various geographies. One of the results is our quick move to a more cashless society with even small businesses needing to quickly develop online presences and offer customers alternate, digital, secure payment options in order to stay afloat amid COVID-19 restrictions.

Even before that, cash was seemingly no longer king considering Google Pay, Apple Pay, Samsung Pay, TransferWise and similar options available. Through these service offerings, non-financial brands are circling the periphery of financial services, but may land in the not too distant future. Not only can we expect more customer behaviour change, but those who, in future, facilitate such financial behaviour may not be the names we would usually expect or associate with such services.

It can be expected that the consumer behaviour change seen, and supporting infrastructure such as in the case of digital payments, is but a gateway to broader adoption in future. Not only are behaviours changing, but the customer base is changing too, as these developments further decrease the barriers to entry for previously marginalised parts of the market and draw more people into the formalised system to benefit from its safety and value.

It’s been illustrated that, every time the cost of data drops by, for example, 10 per cent, active usage increases by millions of users. The potential to change lives is enormous, and the changing market is craving new ways to save and transact and, indeed, build wealth to which businesses must respond. Early adopters already posed challenges for firms given their demand for more customer-centric options at their disposal and the demand for real-time insight and response. Adapters have now joined this group in a big way. Customer demand has necessitated improvements in existing technology in its development, deployment and delivery.

This demand has fuelled services in the market such as cloud computing offering supercomputing power from the likes of Amazon, Google and Microsoft. These can still rack up major costs, and so, product builds have catered for their clients through microservices able to mitigate large-scale disruption caused by single points of failure. If you’re on Paypal, for example, the ‘make a payment’ button you use is actually a separate app as are Netflix and Amazon’s user reviews. Keeping up with user’s desires for optimised experiences and service will continue to create its own challenges and encourage further change in the tech ecosystem of services and service providers.

Consumerism still reigns. A changing, technologically-savvy audience of customers is fuelling the changing landscape, and established firms will need a strategy to keep up. Regulation in this space has itself become a fundamental to brand equity given customer concerns addressed and, to a certain extent, promoted by developments like the General Data Protection Regulation (GDPR). Time, value and convenience are highly sought-after criteria for customers, but they further demand this from reputable companies who they can trust are on top of their game. Institutions need to adapt and respond proactively, or fall by the wayside.

Security
Customers and regulators alike demand security from firms to the point that stringent security measures are a non-negotiable. The changing digital reality and the increasing presence of AI and ML imply that cybersecurity initiatives need to be, and indeed, remain, on point. Capital markets are, by nature, vulnerable to cyberattacks and will continue to be so with increased reliance on information technology and digitalisation. With the evolving sophistication of cyber threats and associated attacks, firms need to remain on high alert.

The security reputation of the digital assets industry may be arguable at present, but this is changing rapidly. The wave of digital developments offers opportunities for further security progress as is evident in the number of quality custodians about and their respective offerings. Developments in cryptocurrency, for example, allow businesses like OSL, Asia’s leading digital asset platform, providing SaaS, brokerage, exchange and custody services, to screen all coins or tokens on the platform to determine whether that digital asset has been tainted by gambling, ransomware, and the like. Real time risk scores applied to digital assets allow immediate action to quarantine or isolate that asset and take the necessary measures such as notifying authorities.

As capital markets develop, so to do the ways to protect them. Emerging technologies like AI, ML, RPA mentioned as well as cloud computing and big data further offer opportunities for firms to develop more effective security measures.

Final Words
Digitisation, regulation and client expectations are reshaping the capital markets landscape. Within their area of the fintech landscape, capital markets industry experts agree that the rate of change and, indeed, disruption, is a major factor given the ubiquitous nature of technology. More household financial names will stake their claim in the digital space and, indeed, up their service offering with new, digital solutions as companies adapt and change to the new way of working and transacting. Billions are being spent annually to make this happen.

The new reality is, in part, due to our collective COVID-19 experience and how this has accelerated digital adoption. It has been a difficult year, and existing opinions vary from a positive to gloomy outlook of what to expect. While no one can predict the future with total accuracy, there are, however, tell-tale signs of what’s to come in the developments that are already unfolding in the capital markets industry. The unanswered question is whether capital market participants and users are able to adapt, change and remain competitive.

Read the summary of the POWERTALK session here and more on this topic  from a Q&A interview with Peter Burns.

Note: Register now for WIEF-SIDC POWERTALK webinar on banking and capital market trends on 8 December 2020. The session is RM371. Check this link for the programme.

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Main photo by Hitesh Choudhary on Unsplash