Blockchain and fintech-business founder and investor Jason Jones has joined ConsenSys to run its newly formed asset-management group.
With the job title of entrepreneur in residence, New York-based Jones oversees a team fostering entrepreneurs in capital markets that are developing the infrastructure for finance in a decentralized context. (He continues to run other businesses, including a fintech investment group, Cardinal Rose; robo-advisor builder NSR Invest; and blockchain conferences companies.)
“Every component of capital markets is being reinvented for blockchain, and we’re seeing real businesses emerge,” Jones said. “In asset management, we’re seeing a shift from digital assets to tokenization of real assets.” He lists real estate, credit or securitization, and supply-chain finance as the most active areas. “Over the next three years, these are deep categories where we can deploy a ton of money.”
Right now ConsenSys is investing in startups deal by deal, although it is likely to set up a multi-asset, multi-manager fund structure for fintech. Jones is looking to add asset managers that ConsenSys can bring into its incubator and grow a track record. He is also open to working with traditional hedge funds or other investment firms to do a joint venture or a segregated managed account in the crypto space.
Building decentralized infrastructure
ConsenSys was founded by Joe Lubin, the co-creator of Ethereum, as a foundation to foster the network and related ecosystem, and to help blockchain and tokenization go mainstream.
To date the most developed applications it is incubating are those establishing infrastructure, primarily based on the Ethereum protocol: wallets, cloud computing, and developer suites.
But of the roughly 50 companies incubated by ConsenSys, about half are fintech-related. Jones is working with the existing fintech players to help them develop. He also connects them to ConsenSys’s solutions group, which works with enterprises, including banks and insurance companies.
“We’re building these to get them out into the market, and our solutions group can then select and combine these for specific enterprise customers,” he told DigFin.
Jones says the challenge for ConsenSys overall is still solving the technology so it can scale.
Ethereum’s more famous co-creator, Vitalik Buterin, is leading efforts to enable Ethereum to scale to levels that make it robust for enterprises, while retaining the advantages in security and decentralization that public, permissionless blockchains offer. (See our story on the company behind EOS, an emerging competitor network.)
The smart B2C robot
As Ethereum developers wrestle with the tech, the business models for ConsenSys companies are still evolving. “We’re taking traditional capital markets infrastructure and deploying it onto the blockchain, but we haven’t yet seen natively digital business models emerge” in fintech, Jones said.
And many aspects of capital-markets infrastructure are still missing in the decentralized world. For example, Jones notes that custody solutions have emerged, but not a prime broker model, combining safekeeping with balance sheets.
The sheer number of centralized crypto exchanges also creates the need for investors to integrate across many platforms, and manage and route orders. “ConsenSys is incubating fintechs to build this infrastructure so we can institutionally deploy investments,” Jones said. “Tokenization will come, and big asset managers will want to invest in these.”
What’s the longer-term vision? What can ConsenSys try to stitch together from all of these disparate projects?
“The company I’m looking for is a true robo-advisor,” Jones told an audience from a discussion at Singapore Fintech Festival. “It’s a speech-based A.I.-powered robot that I can talk to, that can help me with all of my personal accounts, and has the intelligence to proactively tell me where I should put my money. I’m talking about a B2C smart robot that can determine how everyone will manage their money, and there will be lots of innovation around that.”
New China distribution not just for money-market funds
Investors on digital platforms are beginning to look to other products, says BEA Union’s Rex Lo.
This week DigFin is highlighting three asset-management firms’ approach to digital distribution, particularly in China. We will also provide strategies from Invesco and AllianceBernstein. Go here for more insights into digital asset and wealth management.
Retail investors in China accessing funds via digital platforms are beginning to diversify away from money-market funds. That is creating opportunities to push ETFs and active funds, says Rex Lo, managing director for business development at BEA Union Investments.
China’s retail funds industry is mainly about money-market funds (MMFs). The total industry size is Rmb13.2 trillion, or $1.9 trillion, of which MMFs account for 57%, or Rmb7.7 trillion.
Among MMFs, by far the biggest player is Tianhong Asset Management, whose product, Alibaba’s Yuebao fund, is Rmb1.2 trillion in size, or $162 billion – the largest money-market fund in the world.
It’s no surprise then that digital distribution platforms in China mainly cater to MMFs. Lo says until recently, MMFs accounted for about 80% of all funds sold on digital platforms. This is propelled businesses such as Tianhong (which of course is sold via Ant Financial) and a few bank-affiliated fund houses with big MMF products, such as CCB Principal and ICBC Credit Suisse.
But it has made digital distribution of limited interest for fund houses looking to sell equity funds or other actively managed products; for them, traditional distribution via banks has remained the only viable channel.
MMFs: less big
Lo thinks this is changing, however.
The popularity of MMFs lies mainly in the fact that they offered high returns combined with guarantees, real or assumed by investors – assumptions the government has been reluctant to upset.
Yuebao and other MMFs usually invest in non-standardized wealth-management products (themselves supposedly “guaranteed”, with investors assuming a government backstop), that returned 5% to 8% to those managers. They in turn offered investors 5%, an equity-like return on what’s meant to be an ultra-safe and liquid asset class.
Over the past few years, however, Chinese banking and securities regulators have been trying to shift the funds industry onto a footing that respects risk and return, and clamping down on the supply of shadow-banking instruments available to portfolio managers.
“Today MMFs return only a little over 2%, while A shares are doing well,” Lo said. “As demand for money market funds declines, turnover has fallen, so these distributors are now promoting index or active funds.”
In recent months, Lo says, MMFs account for only 70% of sales on digital channels, with ETFs now gaining ground.
Accessing the mainland market
BEA Union is able to sell its Hong Kong-domiciled Asia fixed-income fund to Chinese retail investors through a scheme called MRF, Mutual Recognition of Funds.
This program, which began in 2015, allows fund managers on either side of the border to sell eligible products through a master-agent arrangement. Regulators in mainland China have been slow to approve such funds, however, and there are only seven Hong Kong products available via MRF, including BEA Union’s (and 48 mainland funds available for sale in Hong Kong).
Lo is hoping to take advantage of the shifting fortunes among asset classes to use digital channels to push BEA Union’s bond fund.
Platforms such as Ant Financial are requesting the fund house for more material around equities and active funds management. It’s a big, long-term commitment to investor education – especially for foreign fund managers whose ranking is low on Ant Financial and other digital platforms.
“Domestic investors want familiarity,” Lo acknowledged. “But we continue marketing because we want to be on the platform. Today it’s more for exposure than real [inflows], and ticket sizes are as small as Rmb100 ($14). But if you have 100,000 investors, that becomes a lot of money.”
The intention of this ongoing marketing is to become sufficiently well known among Ant’s users to take advantage when retail investors want to invest overseas.
New ways of doing business
Adding platforms such as Ant to traditional distribution methods has been an eye-opener, Lo says. “They don’t think like a traditional finance company. They’re a fintech, so they’re very responsive and open to new ideas. And they’re independent – they’re not a bank with its own funds J.V. – so there aren’t conflicts of interest.”
Marketing was not the only part of business that had to adjust.
“I was amazed when we began to work with these firms,” Lo said. “Enhancements that would take months to get done in Hong Kong take them a few days. We can learn a lot from working with fintechs.” It’s knowledge that will come in handy as more banks in Hong Kong and Asia add mutual funds to their mobile trading apps, as Standard Chartered did earlier this year.
There are limits, however, to how far a fund house can go selling products on mainland China’s digital platforms.
Those channels are limited to funds from either local licensed retail-facing houses, or offshore products eligible via MRF. The retail funds market in China, at $1.9 trillion, is only a fraction of the total investments industry, which is about $9.7 trillion – but that includes separate licensed businesses for asset managers linked to insurance companies, or to trusts, or to banks. Those businesses for now can’t market to retail or use sell via e-commerce players.
BEA Union is a joint venture formed in 2007 between Bank of East Asia and Germany’s Union Investments. Its initial business model was to service local pension and insurance customers, so its investment expertise has been mainly in Asian fixed income. It has since developed funds in Hong Kong and Asia equities, and its total AUM is now $11.2 billion.
It is the only foreign fund house to establish a wholly owned foreign enterprise (Woofie) in Qianhai (part of Shenzhen), as opposed to Shanghai. This was partly because the authorities in Qianhai were very welcoming, and because Bank of East Asia has a presence in southern China, and the fund house hopes to take advantage of this should cross-border opportunities emerge (under the concept of a “Greater Bay Area”).
This medium-term ambition is another driver of BEA Union’s strategy to build an online brand on Ant Financial and other digital platforms.
AllianceBernstein looks to add value to digital channels
Ajai Kaul, regional head, says the buy-side battleground is moving to banks’ evolving digital distribution.
This week DigFin is highlighting three asset-management firms’ approach to digital distribution, particularly in China. We will also provide strategies from Invesco and BEA Union Investments. Go here for more insights into digital asset and wealth management.
Asset managers need to be ready to work with banks’ digital capabilities to reach retail investors.
Ajai Kaul, the Asia ex-Japan CEO at AllianceBernstein, a $580 billion investment firm, says digital distribution remains a puzzle for the industry. Although new channels are emerging, particularly in China, asset managers will likely adapt to what their existing distributors do online.
“Banks have the capital and the captive client base,” he said. “As asset managers, we deliver a product and service the client, including their digital engagement. So we need to understand how we’re going to plug into what banks are doing.”
Over the past two decades, banks in Asia have transitioned away from supermarket approaches involving dozens of manufacturers to a core set of perhaps 20 asset managers on the shelf.
Banks represent the vast majority of sales to retail investors in the region, so asset managers remain dependent keeping these relationships. Although buy-side firms recognize the importance of “digital transformation”, in Asia at least they are waiting to see which way their distributors move.
Follow the banks
“Banks are already responding with their own digital strategies and we need to continue to engage them and plug into their platforms,” Kaul said, adding this is likely to be more around operations, education and reporting than marketing or front-office activities. “We’re having conversations now about what this might look like…I do not believe banks are about to cede customers to the digital and online service providers.”
One aspect is likely to change how asset managers support distributors with things like marketing material. This will increasingly be less about papers and statements, and more about real-time online communication. And it will change the way asset managers arm financial advisors, bank salespeople and other intermediaries with information about their products, and about investing.
“People want convenience,” Kaul said. “They’re used to instant transactions. But we need to ensure that they understand what they’re buying.”
That principle sounds simple but it’s not clear how it will materialize. Does that information get communicated at point of sale, or via a continuous stream of back-and-forth with investors? Who is responsible for education – and who finances it?
The prize for getting this right is data-driven insights that enable fund mangers to build better products, with more tailored, suitable features, be it about liquidity, or asset classes, or risk. “You can scale faster if you get a real insight,” Kaul said. “And there’s a lot of data – if you ask the right questions.”
What about direct?
Is there a point at which asset managers will also go direct to consumers?
Kaul says this could emerge as a complementary strategy, but: “We’ll always be working with banks. Wealth management and financial advice are just tools for banks, along with loans, credit cards and foreign exchange.”
In other words, banks will retain the overall customer relationship, at least as far as asset managers are concerned – although banks themselves are now eager to cement their customer relationships in the face of being themselves swallowed up into “ecosystems” dominated by consumer-facing tech platforms.
Kaul is also looking at more direct digital channels, notably in China, where AB, as the firm is known, is licensed as a private fund manager, which can raise money from professional investors but not retail.
This makes PFMs unappealing to domestic banks, which can’t sell their products to their retail clients. Most sales are institutional in nature, but digital channels are becoming relevant.
This is still however more theoretical than real for firms like AB. But Kaul and his colleagues are putting time into studying the market.
“We need to understand mobile platforms and how we engage with them, in general,” he said. “In mobile environments, we can’t just be a product on a shelf.”
The China experience
So far the majority of funds sold in China through such channels are money market funds. But platforms such as Ant Financial, EastMoney and WeChat are beginning to develop more advice-based services that will help users with financial planning.
“How does a fund manager add value?” Kaul said. “If a transaction is on a mobile phone, that’s a very small piece of visual real-estate to work with, or become prominent on.” Fund products are usually three, four or five clicks away from where users spend their time on these platforms. Foreign fund managers do not enjoy brand recognition in China. “Just being a product isn’t sufficient to win traffic,” Kaul said. “You have to present something of value that creates interaction between the user and AB.”
He says China offers a good place to begin this learning process, given the popularity of these channels for everyday use. And within the Chinese context, these digital platforms are similar – if a fund house can master one, it can adapt a similar method to the others.
What’s special about mainland China isn’t the platform so much as it’s the investor culture, which ever since the stock markets appeared in 1990, have been habituated to short-term trading.
“How we build and deliver product may not match the local wealth market, which has developed its own biases toward duration, time horizons and the purpose of investment,” Kaul said. “But the population there has fully embraced mobile platforms, as we can see by the sheer volume of transactions now taking place. China is the front line of innovation.”
BNY Mellon pursuing “open architecture” in custody
The bank is forming alliances to connect data to front offices – and affirm the custody business model.
BNY Mellon recently announced a partnership with Bloomberg, which comes on the heels of another with BlackRock.
The aim, says Singapore-based Mathew Kathayanat, head of product and strategy for Asia Pacific, is to provide value by bringing critical data and insights into the front office, allowing clients using both BNY Mellon and its partners to improve the investment-decision process. “We’re open architecture because we know our clients want flexibility and choice,” he said.
Custody represents the primary revenue generator for the world’s biggest banks. Custodians act as the vault for institutional and corporate accounts, safeguarding assets, collecting and reporting on related information (such as corporate actions), providing accounting, maintaining funds’ registrars, handling foreign exchange, and providing a range of legal, tax and compliance services related to those funds.
Although fees on core custody are ultra low, the volumes that top banks generate still makes custody valuable. Despite low interest rates, custodians still earn a spread on holding customer deposits, and lending out client assets (splitting the gains with the client) is lucrative. During the global financial crisis, custody provided steady revenues at a time when other banking activities were in peril.
But this bulwark is under threat from fintech. Many of the services banks provide are now available from tech companies as modular, plug’n’play software-as-a-service.
Some custody functions may resist being displaced: robots aren’t trusted to cut a fund’s NAV (net asset value) or to handle all middle-office functions such as risk management and compliance. On the other hand, fund accounting and middle-office outsourcing are usually loss leaders for custodians, as these activities do not generate revenues. The lucrative bits, such as core custody, forex and securities lending, are the most at risk.
That’s the background to BNY Mellon’s teaming up with partners, most recently Bloomberg. BNY Mellon will integrate its data, analytics and servicing capabilities with AIM, Bloomberg’s portfolio management system. Buy sides using AIM for trading can now access BNY Mellon’s data tools directly.
This follows a deal announced in April to give similar access to BNY Mellon data to users of Aladdin, the investment and operating management platform offered by BlackRock solutions and used by many buy sides (including by BlackRock itself, which manages nearly $6 trillion in assets).
Alliances versus acquisitions
The partnership approach is different than rival State Street, which has opted to acquire platforms used by clients instead. The capstone of its M&A was last year’s $2.6 billion purchase of Charles River Development, a front-office platform for asset managers – in effect, taking on Aladdin directly. (BNY Mellon has $35.5 trillion of assets under custody or administration; State Street has $32.6 trillion.)
In both cases, the first reaction by the biggest standalone custodians has been to get bigger by adding front-office facing platforms, either through acquisition or partnership. The idea is to make their custody solutions easy and attractive to CRD, Bloomberg or BlackRock customers, either to win their existing clients, or to prevent the banks’ own users from leaving. Winning clients new to any existing players is a third goal.
Data has huge value, but does that mean custodians simply digitize?Mathew Kathayanat, BNY Mellon
What these deals don’t do, however, is address the fundamental changes in client demand regarding data. Banks, especially custodians, have tons of data. They are awash in data. Yet even these institutions, for all their technological might, are struggling to turn it into a business that can safeguard their margins.
Kathayanat acknowledges this. “Data has huge value, but does that mean custodians simply digitize? That’s not a replacement for the custody business. The alliances will bring critical data further up the value chain and give clients a better end-to-end experience.”
Data’s integrity problem
One reason is data integrity. In a nutshell, data is messy. Even asset owners that use a single global custodian hire vendors to sit between them and their bank in order to reconcile data.
Even though in this case the settlement and transaction data is all from the same bank, there are discrepancies. A single bank relies on multiple operational centers, on multiple sources of reference data, and still has to use manual procedures for a lot of work, such as fund accounting. This inevitably leads to errors.
Most asset owners, particularly in Asia, prefer to use multiple custodians. Therefore the problem of data integrity is compounded. That makes it hard for banks to sell, say, services based on artificial intelligence. Instead, banks and vendors have been amassing “data lakes”, to try to pool their data into a single, reconciled format.
In the end, though, this means that clients continue to operate their own books of record and cut their own NAVs. The system works, but it’s inefficient.
The best response to the problem of data integrity has been enabling clients to pull their information directly from the custodian, rather than passively waiting for the bank’s scheduled report.
“APIs have been a great help,” said Kathayanat, who has seen asset owners leapfrog from relying on faxes to A.I.-driven KYC and other functions, supported by the rise of fintechs as well as a desire among institutional clients to have a retail mobile experience, seeing their trades on their phone whenever they wish. “We have to stay relevant.”
That’s where BNY Mellon’s partnerships come in, integrating digital tools directly to order-management systems like Aladdin and AIM to allow real-time settlement data, cash forecasts, corporate actions, and other information be visible to the client’s front office.
These deals are large, but Kathayanat says they won’t be enough. “We have more partnerships in the works,” he said.