- Capital Raising
Alternative capital raising platforms
The universe of processes that can be moved outside of the financial is growing rapidly, allowing organizations to reach new levels of efficiency and sophistication, while also driving shifts in competitive dynamics and the benefits of scale
The number of processes considered “core” to the business operations of investment institutions is shrinking with a wave of modern outsourcing services. Secure transfers and cloud-based technology have created opportunities to leave behind antiquated legacy IT systems by externalizing key processes and highly specialized third parties have begun to exploit this. The new breed of providers use highly flexible, mostly cloud-based platforms to offer banks more sophisticated and efficient solutions than has previously been achieved in-house. Transaction monitoring, regulatory compliance and risk management are among the core capabilities likely to be increasingly outsourced in the near future.
Regulatory disclosures: an example of efficient externalization
One notable area of change can be seen in the potential for external providers to consolidate regulatory compliance capabilities through increasingly centralized and automated ways to communicate with regulatory agencies. London-based FundApps specializes in making regulatory disclosures for investment funds through a cloud-based management service. It constantly monitors investment restrictions, triggering automated shareholding disclosures for clients across different regulatory environments as required. Such services may prove invaluable in light of the increases in the regulatory burden since the global financial crisis.
They could lead to ‘black-and-white’ regulation with less room for flexible interpretation but will enable financial institutions to respond faster to regulatory changes and improve their overall compliance.
Alternative platforms will help start-ups grow rapidly and give investors more control, ultimately making the overall ecosystem richer for new entrants and incumbents alike
External providers reshape the ecosystem
Other important implications of the gradual transfer of responsibilities to innovative, external providers could include:
- financial institutions becoming less able to differentiate themselves through such processes. This could cause a loss of negotiating power, as well as greater dependency on external providers for continuity
- ‘human’ factors such as decision-making coming to the fore as institutions consider which capabilities they should remain focused on in order to achieve competitive advantages that external providers cannot match. The ability to offer unique market insights could be key
- potential for loss of skill in the workforce in the long-term due to the externalization process – something that could have ramifications in terms of the wider picture of financial services operations
- small and medium-sized organizations becoming better equipped to compete with bigger players after accessing top-tier processes from outside providers that were previously out of reach due to lack of scale
- an increase in the turnover of new entrants to the investment management market as externalization removes traditional barriers
- large financial institutions looking to create, fund and acquire innovative outside providers as they seek to sustain the scale-driven advantages they have enjoyed in the past but which could now slip away
Agility and unique insights key to staying ahead
The externalization of key processes in investment management is set to continue and is sure to shake up the wider financial ecosystem. As this streamlining and commoditizing of capabilities continues, it will become ever more vital that banks are agile enough to adapt to the shifting landscape. Major incumbents could also face growing competition from mid-sized players able to scale up at greater pace.
They will need to deal with external providers built on managed services models, as opposed to today’s vendor models, and find ways to prevent complete loss of negotiating power and continuity.
It will be crucial for investment institutions impacted by the changes to identify and invest in remaining core strengths that will help differentiate them from competitors. People skills and considered insights that cannot be easily replicated are likely to be foremost among them.
Implications for financial institutions
Erosion of wealth management:
As individual customers gain access to investment products with potential higher returns and / or better aligned to their interests, their investments in traditional wealth management products will be partially eroded over time.
Competition for investments:
While distributed capital raising platforms and traditional intermediaries may have limited overlap in investment opportunities, traditional intermediaries will need to compete for investments, especially from angel investors, against distributed platforms where investors can play more active role.
Shortening capital raising cycles:
With access to more diverse funding options, new companies will be able to grow at a quicker pace and the average time between funding stages will be shortened.
- Angel Investors
- Capital Raising