By Regulation Asia | Published on July 3, 2020
Successful virtual banks may venture into wealth management services, robo-advice and fund distribution, according to a new Calastone paper. According to a new white paper from Calastone, virtual banks could finally enter the fund distribution space and reshape the industry.
Currently, virtual banks are still in the nascent stages of their life cycle, and the eight licensees are expected to offer fairly mundane services such as low-value retail lending, savings, payments and card services. So far, two virtual banks (ZhongAn Bank, Airstar Bank) have fully launched their businesses, and three virtual banks (Mox Bank, WeLab Bank, Ping An OneConnect Bank) have launched pilot services.
If they succeed in capturing market share, virtual banks can start offering wealth management services to clients and even expand into fund distribution, which is considered fragmented, intermediary, expensive and highly manual. "The process of purchasing funds from traditional financial service providers - even through online channels - can be quite cumbersome, mainly because of the plethora of options available to investors and the fact that banks' systems continue to rely on legacy technology," said Leo said Chen, managing director and head of Asia at Calastone, a global fund network.
According to the document, virtual banks may even incorporate robo-advisory services into their product suites to enhance their investor appeal, similar to the AI-powered virtual assistants many big banks have already rolled out. “The reality is that companies like Alibaba and Tencent are already distributing funds, although virtual banking licenses may be a way for them to speed up the process,” said Ned Phillips, founder and chief executive of Bambu, a provider of robo-advice software.
"I envision some technology companies -- because of the huge amount of user data they have -- that will eventually develop their own financial plans for their customers and ask them if they want to invest in it." Any investor in low-value funds who cares may end up being served by a virtual bank. Calastone’s Chen said virtual banks with a sufficiently strong customer base could start offering automatic fund allocation, which he said would appeal to non-high-net-worth retail investors.
This model has been crucial to the success of Ant Financial’s Yu’e Bao money market fund, which has successfully attracted retail investors — including cash-poor millennials — who would not normally invest in funds. Meanwhile, the traditional fund industry is expected to take a hit from Covid-19 in terms of performance, frustrating existing investors who have already started buying deals elsewhere and in some cases investing in index trackers. With assets and expenses under pressure, asset managers need to identify cost savings and provide operational alpha to investors, the document said, highlighting distribution processing as one area where cost savings could be realized.
Last year, Calastone migrated the technology behind its fund trading network to a distributed ledger for this very reason — to reduce the complexity and costs associated with fund distribution. Asset managers also need to invest in technology to digitize their business and make the buying process "more enjoyable" for clients, the newspaper said. “Tech companies are going to be the future of distribution, so asset managers need to start working with them, while also preserving their historic distribution relationships,” Phillips said.