Without a doubt, 2017 has been a rocky year for financial services; with political upheavals, economic uncertainty and planning for numerous regulatory changes coming into effect in 2018.
In 2017, Brexit was the talk of the town, with “uncertainty” a word bouncing around the finance sector. As such, the key focus was on the financial services industry crafting their post-Brexit strategy, namely how to continue having access to both EU and UK markets and in turn catering to their clients’ needs.
According to Brickendon, while political events will continue impacting financial services, including Brexit negotiations, next year digitalisation and data will dominate alongside Robotic Process Automation and Blockchain, making larger waves in the sector and paving the way for uncapped growth and innovation.
More than three quarters (77%) of commercial banks are preparing to increase fintech investment over the next three years as the rapidly growing sector shows no sign of slowing, with 86% of senior managers expecting an imminent rise in investment.
The in-depth research commissioned by Fraedom, polled 100 decision-makers in commercial banks including shareholders, middle managers and senior managers.
The survey also discovered that more than seven out of 10 (71%) respondents believe the rise of technology within commercial banks threatens traditional one-to-one banking and customer relationships. This was felt strongest among 95% of shareholders, as opposed to 67% of middle managers.
Kyle Ferguson, CEO, Fraedom, said: “The research reflects what is an upward curve for fintech organisations and to continue this trend it’s important for commercial banks to make the right choice when working with a fintech provider. By working with a trusted partner that understands the challenges of local markets, and equally how digitisation of commercial banks can support financial service offerings, this choice can often lead to further investment in the fintech industry.”
The research also revealed that despite an overall feeling that the future of the fintech sector is exceptionally bright, nearly two thirds (63%) of respondents believe commercial banks are more cautious than retail banks when it comes to adopting new technologies.
In addition, it was discovered that the most common reason for commercial banks lagging behind its retail counterpart was that ‘the market was settled and there was no strong competition from newcomers until now’. This was supported by 37% of respondents that felt retail banks surpassed commercial banking in the uptake of technologies.
“The commercial banking sector must become less cautious in embracing new technologies, especially when fintech firms can support areas of their service by outsourcing operations such as commercial cards,” adds Ferguson. “When technology is embraced at a faster pace, the gap between commercial and retail banks will become smaller and the collaboration between banks and fintech providers will help drive the future of finance, benefitting consumers, businesses and of course the industry as a whole.”
The US economy’s growth rate last quarter was recently revised on the basis of stronger investment from businesses and government bodies than previously assessed. GDP in Q3 was revised up to 3.3% annual growth rate compared to the previous quarter. This was according to the US Department of Commerce in a press release on the 29th November 2017.
This week Finance Monthly reached out to sources across the globe to hear their take on the current situation in the US, what has impacted growth across several industries, and what the forecast for 2018 looks like.
Josh Seager, Investment Analyst, EQ Investors:
US growth was revised to 3.3% annualised on Wednesday, up from an initial reading of 2%. This was the fastest growth rate in 12 quarters but there is likely to be some hurricane distortions, so we must interpret the data with caution, we don’t expect it to continue at this level.
Looking into the numbers and things look broadly positive. Consumer spending, which accounts for around 70% of the US economy, remained strong, growing 2.3%. This wasn’t quite as strong as last quarter but is a good level nonetheless and shows that the US consumer is relatively healthy. For the consumer to continue to spend, we really need wage growth. So far, this has been pretty anaemic in spite of very low unemployment. We believe this could be about to change. NFIB Small Business Surveys show that 35% of small business are now finding it hard to fill jobs and 21% are planning to raise compensations as a result. This data points are at cycle highs and this is highly likely to feed into US wage growth at some point.
Business investment picked up, contributing 1.2% to growth, up from 1% the quarter before. This is a pleasing sign as it suggests that corporates are gaining confidence in the economy and are willing to make the investment necessary to capitalise on this. Corporate profits were also up last quarter which should give corporates the financial freedom to continue to develop and (hopefully) growth wages.
Dan North, Chief Economist, Euler Hermes North America:
Tim Sambrook, Professor of Finance, Audencia Business School:
The upward revision, from previously 3.0%, was mainly due to a higher than expected increase in public and private spending.
The increase compares favourably with the second quarter of 2017 of 3.1%, and the third quarter of 2016 of 2.8%. It is the fastest rate since Q3 2014.
If the current estimate of growth in the Q4 GDP is realized, then this would represent the first time since 2004 that the US economy has posted three consecutive quarters of over 3%.
The growth rate is in line with the government’s target. They are engaging a tax cut plan to lift GDP to 3% annually. However, economists see such a pace as unsustainable and expect growth to slow sometime in 2018.
If you were to look for some bad news in the revision, then you could point to the fact that the revision comes from public and private spending and not consumer spending, which makes up 70% of the US economy. In addition, inventory build-up was significant and could prove to be a drag on growth in the future. However, this upward revision comes with a backdrop of severe hurricanes and low wage growth, which should have been quite negative for consumer growth.
This positive news will strengthen the case for the Fed to raise rates next month, although the announcement had little effect on the dollar or the markets.
Duncan Donald, CEO, The London Academy of Trading:
The highlight of last week’s US data card was the release of the GDP numbers for the third quarter of 2017. The number brought US GDP from 3% to 3.3%.
This is slightly above the median expectation of 3.2%, and shows the US economy continues to expand progressively with the GDP reading being the most aggressive since late 2014.
But in context, what does this mean for the US rate path, as the December rate decision from the Federal Reserve rate setting committee comes next week? From freshly inaugurated Federal Chair Jerome Powell’s perspective, the data is on course for a hike. Even the departing Janet Yellen appeared to shift her dovish tone, referencing data with the possibility of a hike in December.
We need to look no further than the recent performance of US stocks and the dollar for confirmation that the market believes in the upcoming rate hike. Despite the ongoing investigation into President Trump’s electoral campaign, which is an obvious anchor, there are no signs of a slowdown in the US positivity story. The one final hurdle for the market to overcome ahead of next week’s decision is the Non-Farm Payrolls on Friday. The data has been somewhat muddied over the last few months, as hurricanes have taken their toll. However, this month, we should expect to get a true reading on the strength of the US jobs market.
A strong Friday performance will push the market up the final few percent towards a December hike.
John Lorié, Chief Economist, Atradius:
Across the Atlantic, the US economic outlook is also robust, which is reflected in high business confidence. US GDP is expected to expand a solid 2.0% in 2017 and 2018. The positive outlook is supported by strong job growth, very low and still declining unemployment, and even firming wage pressure. In this environment, the number of bankruptcy filings is at historical lows. In Q3 of 2016, the number of bankruptcies in the US reached its lowest quarterly level since Q4 of 2006. We forecast a 4.0% decline in the overall number of insolvencies this year and a mild 2.0% decline in 2018. The US outlook is subject to risks, on the upside (tax reform) as well as downside (trade, NAFTA).
We would also love to hear more of Your Thoughts on this, so feel free to comment below and tell us what you think!
With plenty of change coming in 2018, here Emmanuel Lumineau and Thomas Schneider, Founders of BrickVest, delve deep into the future of real estate for the coming year, prospects of growth and challenges ahead.
2017 was a strong year for the real estate industry. Despite a number of external factors that could have easily affected market performance, low interest rates remained stable and demand in real estate investment products continued to rise.
Brexit has clearly had an effect on the UK but we believe that across Europe, there remains strong deal flow levels and investment opportunities. Our recent research1 showed that one in three (33%) commercial real estate investors highlighted Germany as their preferred region to invest in. This is the first time that Germany has been chosen as the number one region to invest in and ahead of the UK which was selected by a quarter (27%).
The UK saw a drop from 31% in the last quarter and from 32% in the same Barometer 12 months ago. The Barometer also revealed that UK, French, German and US investors are now less favourable towards the UK since last year. 45% of UK, nearly a quarter (21%) of US, a fifth (19%) of French and 18% of German investors suggested they favour the UK this quarter, representing a decrease from last year across the board from 46%, 26%, 28% and 21% respectively.
Despite investors seemingly focussing away from the UK, there has been an abundance of international capital flowing into real estate, almost every major institutional investor globally has been increasing their portfolio allocation to real estate over the last five years mainly because of lack of alternatives.
Moreover the average risk appetite of BrickVest’s investors continues to rise to 52% from 49% last quarter and from 48% this time last year, meaning a sentiment shift from low to balanced risk
The Bank of England’s decision to raise interest rates in the UK in November was momentous for the economy and should signal the start of a series of gradual increases. The Bank decided that inflation is potentially getting out of control and the economy now requires higher borrowing costs. In contrast, the ECB’s decision to unwind its QE programme to €30 billion a month is a glowing endorsement of healthy Eurozone growth and falling unemployment, which will more than likely mean that interest rates will stay at historic lows until at least 2019 in order to help financial markets adjust.
Increasing interest rates has a direct impact on real estate. Higher interest rates and rising inflation make borrowing and construction more expensive for owners, which can have a constraining effect on the market but can also lead to an increase in property prices. In a low interest rate environment, European real estate yields will continue to look attractive and real estate serves as a good alternative to fixed income.
Value in 2018
We expect to see increasing demand for real estate in 2018. Indeed our research2 showed that two in five (40%) institutional investors plan to increase their allocation to European commercial real estate while 44% expect commercial property yields to increase in the next 12 months, just 22% believe they will decrease.
We believe that the best value can be found in real estate deals that are not too sensitive to price erosions. Investors should keep a close eye on the risk of high leverage and DSC ratios. We believe that the best investment options for 2018 will most likely be found in value-add real estate in combination with a conservative financing policy.
Investment strategy 2018
Given the fact that we believe demand will remain relatively high in 2018, one of the main challenges will be to find good deals.
Investors will have to find the right balance of higher leverage (due to continually low interest rates) and being able to handle potential price corrections in the event that the market cools off due to external factors such as Hard Brexit, escalation in the US vs. North Korea conflict, etc…
Institutional investors are investing in less liquid secondary and third level cities to achieve acceptable going-in cap rates (cap rates in major markets such as Paris are historically low). Investors will also be forced to look at less traditional investment products such as student housing, services apartments, and senior housing or industrial to get better returns. The overall risk of these investment is that they are in general less liquid and if the market bounces back, cap rates will also increase much faster than in downtown Paris.
In order to manage this problem, some institutional investors are now investing in real estate debt products so that they a.) have their exposure to real estate but b.) also have an achievable exit (i.e. when the loan maturity is reached). We think this might be smart strategy in 2018 given real estate prices are already very high and might fall in the long term (so no upside opportunity but also no real downside risk).
Sectors to watch
We continue to see the highest level of volatility from the office sector as many international firms put decisions on hold over their long-term office space requirements. Our research2 with institutional investors highlighted that more than a third (34%) believe the biggest real estate investment opportunities will be found in the office sector and the same number in the hotel & hospitality industry over the next 12 months.
Three in ten (31%) thought the industrial sector would present the biggest commercial real estate investment opportunities over the next 12 months while one in five (19%) cited the retail & leisure sector.
When implemented in January 2018, revisions to the EU’s Markets in Financial Instruments Directive (MiFID II) will radically change the regulation of EU securities and derivatives markets, and will significantly impact the investment management industry. It will have a significant impact for wealth and asset managers on profitability, product offer and their distribution across Europe, operating models and pricing and costs.
As a consequence, we expect MIFID II to widen the gap between global, infrastructure-based players, and local players. Crowdfunding platform may be affected by these changes.
General Data Protection Regulation (GDPR)
GDPR comes into force on 25 May 2018 and represents the biggest change in 25 years to how businesses process personal information. The directive replaces existing data protection laws and will significantly tighten data protection compliance regulation.
Like other industries, real estate companies will have to conduct a risk analysis of all processes relevant to data protection.
Bitcoin’s meteoric rise is attracting a ton of attention. Is it ready for the mainstream?
If everyone is one step ahead of the competition, how is it possible for anyone to be one step ahead? The FinTech sector is currently facing a complex situation where start-ups are one-upping tech giants, and vice versa, on a daily basis. So how is it possible to maintain an edge in the industry? Finance Monthly hears from Frederic Nze, CEO & Founder of Oakam, on this matter.
The financial services industry has entered the Age of the Customer -- in this era, the singular goal is to delight. With offerings that are faster, better and cheaper, new fintech entrants have the edge over traditional institutions who struggle to keep pace with consumers’ rising expectations around service. Yet this is not the first or last stage in the industry’s evolution. Just as telephone banking was once viewed as peak disruption, so too will today’s innovation eventually become the standard in financial services.
What will become of today’s new entrants as they scale and mature? The answer largely depends on why a particular fintech company is winning with customers today -- a hyper focus on problem-solving.
If customer review site Trustpilot is used as the litmus test for customer satisfaction, then clearly banks and other traditional financial firms are falling short of the mark. Looking at the UK’s Trustpilot rankings in the Money category, not a single bank appears in the top 100, and their ratings range from average to poor. Fintech entrants like Transferwise, Funding Circle and Zopa, on the other hand rank highly in their respective categories.
So how is it that such young companies have elicited such positive responses from consumers, beating out institutions with decades of experience and customer insight?
The advantage fintechs have over banks is that their products are more narrowly focused and are supported by modern infrastructure, new delivery mechanisms and powerful data analytics that drive continuous user-centric improvement and refinement. Still, they’ve had to clear the high barriers of onerous regulatory and capital requirements, and win market share from competitors with entrenched customer bases.
The halo effect of innovation and enthusiasm of early adopters, hopeful for the promise of something better, has buoyed the success of new entrants and spurred the proliferation of new apps aimed at addressing any number of unmet financial needs. This of course cannot continue unabated and we’re already approaching a saturation point that will spark the reintegration or rebundling of digital financial services.
In fact, a finding from a World Economic Forum report, Beyond Fintech: A Pragmatic Assessment Of Disruptive Potential In Financial Services, in August this year stated that: “Platforms that offer the ability to engage with different financial institutions from a single channel will become the dominant model for the delivery of financial services.”
Whether a particular app or digital offering will be rolled up into a bank once again or survive as a standalone in this future world of financial services, will depend on the nature of the product or service they provide. This can be shown by separating businesses into two different groups.
Firstly, you have the optimizers. These nice-to-haves like PFM (personal financial management) apps certainly make life easier for consumers, but don’t have competitive moats wide enough to prevent banks from replicating on their own platforms in fairly short-order.
For the second group, a different fate is in store. These are offerings that are winning either on the basis of extreme cost efficiency (the cheaper-better-fasters) or by solving one incredibly difficult problem. Oakam belongs to this second category: we’re making fair credit accessible to a subset of consumers who historically have been almost virtually excluded from formal financial services
The likely outcome for the cheaper-better-fasters, like Transferwise in the remittances world, is acquisition by an established player. They’ve worked out the kinks and inefficiencies of an existing system and presented their customers with a simpler, cheaper method of performing a specific task. However, their single-solution focus and ease of integration with other platforms make them an obvious target for banks, who lack the technology expertise but have the balance sheets to acquire and fold outside offerings into their own.
Integration into banks is harder to pull off with the problem-solvers because of the complexity of the challenges they are solving for. In Oakam’s case we’re using new data sources and methods of credit scoring that the industry’s existing infrastructure isn’t setup to handle. In other words, how could a bank or another established player integrate our technology, which relies on vastly different decision-making inputs and an entirely new mode of interacting with customers, into their system without practically having to overhaul it?
For businesses who succeed at cracking these difficult problems, the reward is to earn the trust of their customers and the credibility among peers to become the integrators for other offerings. Instead of being rebundled into more traditional financial firms, these companies have the potential to become convenient digital money management platforms, enabling access to a range of products and services outside of their own offering.
Self-described “digital banking alternative,” Revolut was first launched to help consumers with their very specific needs around managing travel spending, but today has offerings ranging from current accounts to cell phone insurance. While some of their products are proprietary, they’ve embraced partnership in other areas, like insurance which it provides via Simplesurance. This sort of collaboration offers an early look at the shape of things to come in finance’s digital future
One might ask how the digital bundling of products and services differs from a traditional bank, with the expectation that the quality and customer experience will diminish as new offerings are added. A key difference is PSD2 and the rise of open banking, which will enable closer collaboration and the ability to benefit from the rapid innovation of others. What this means is that an integrator can remain focused on its own area of expertise, while offering its customers access to other high quality products and services
At Oakam, this future model of integrated digital consumer finance represents a way to unlock financial inclusion on a wide, global scale. Today, we serve as our customers’ first entry, or re-entry, point into formal financial services. The prospect of catering to their other financial needs in a more connected, holistic way is what motivates us to work towards resolving an immediate, yet complicated challenge of unlocking access to fair credit.
David Clarke, a top 10 GRC influencer discusses the future of risk and compliance facing corporate and banks.
Below Mark Boulton, Insurance Sector Lead at Fujitsu UK&I, delves into the introduction of automation and AI in the insurance sphere, touching on the future prospects of the insurance sector throughout 2018.
Insurance has always been a grudge purchase, often seen as a necessity or safety net, but not something that immediate benefit is felt from.
It will have been frustrating for many, therefore, to see that car insurance premiums have risen by 11% on average in the last year alone, according to the Association of British Insurers (ABI).
Many of us may even start to question the value we’re getting for our insurance purchases in light of such news.
The price – which is the most important factor in choosing an insurance package (A New Pace of Change, Fujitsu) – is just one element, however. Compounding this situation is the fact that people often find insurers difficult to deal with, particularly when trying to make a claim.
It’s this group of factors that demonstrate the opportunity the insurance industry has to transform itself into a more value-driven service for customers.
At the heart of any change will be technology, and two of the leading areas here are Artificial Intelligence (AI) and automation. How is technology impacting insurance for the better? There are three main areas to consider - customer experience, assessments and risk mitigation.
Think of going through a process for a life insurance policy. Multiple in-depth questions to taken into account age, lifestyle, and health, with an existing model applied to the answers provided.
Such models have been used for decades at some companies, resulting in off-the-shelf packages for people that do not necessarily reflect them as individuals.
Technology is helping change this. Based on any assessment and wider data analytics, automation can quickly produce more personalised experiences for the customer. This might be a payment model that suits their lifestyle or financial situation or a more nuanced insurance package to reflect their needs.
Such personalisation sit at the heart of the transformation. We’ve seen this across other industries, and it is one crucial way insurers can start to move from transactional-based relationships to value-based relationships with their customers.
Convenience and speed
It’s not just adding value of course, it’s getting the basics right. Services like Amazon Prime and Netflix have totally transformed the expectations we have of all companies when it comes to speed and convenience. We want things served to us exactly how we want them, and quickly.
Insurers have certainly made progress in recent years – for example, it is standard now for policies to be quoted and purchased online. More interestingly, however, is the use of apps and chatbots.
These give a holiday maker who may have lost their camera easy access to their policy, but also the chance to ask questions to the chatbot. Powered by AI, we can expect chatbots to play an increasingly important role in the relationship between insurers and policy holders.
Given the often complex nature of insurance policies, chatbots can be a simple way for people to get the answers they need. No need to phone customer services or wait an hour in a call queue; just direct answers delivered instantaneously.
Of course, there is still progress to be made with chatbots, but these will only get better in the years to come.
Apps and chatbots are also interesting because they both rely on and deliver vast amounts of data. The more these are used, the more they can be refined to give people services that suit them better. They fuel the personalised services.
It’s all very well talking about the benefits and transformative powers of technology, but making these a reality is something many organisations are grappling with.
Something I’ve observed in the financial services industry is the existence of distinct groups of employees. On the one hand, there are those innovation-focused, digital savvy experts who want agility, speed and flexibility. On the other hand, there are those who want to focus on the central facets of their areas products - keeping those long-standing traditions working in good order for the customer.
These two groups are naturally at odds. They often speak in different terms, work in different ways, and approach problems completely differently. Imagine the kinds of conversations that might come up with discussing emerging trends like AI and automation. It’s not easy for them to get to the place they need to.
To be able to respond to the concerns being voiced by consumers, and to harness the business agility needed to respond to market trends, insurance businesses from the c-suite down need to make a culture shift. Driving change from the top is the only way to future proof the business in a digital world that has already changed the state of play for good. We simply cannot afford to rely on the same rules.
Find your digital path now
Our ‘Fit for Digital’ survey found 98% of insurers believed their organisation had been affected by digital. A further 72% said their sector would fundamentally change in the next four years.
Change is inevitable. And the technology that will enable that change - including AI and automation – is here today. Insurers must find the cultural harmony to embrace new digital services and products, without losing the heart of what they already do well.
The next few years will see some insurers thrive and others struggle. To be a thriver, it’s vital to the right digital path now.
Below Kathleen Brook, Research Director at City Index, talks Finance Monthly through the current markets environment, referencing US stock, bonds, tech, crypto and oil.
As we reach the middle of the week, there are a few signs that stocks could have a harder climb from here. After reaching record highs earlier on Tuesday, the S&P 500 closed the day lower. Advancers vs. decliners were pretty even on the day, with 243 advancers compared with 255 declining stocks, the biggest loser was Tripadvisor, which sunk on the back of growth concerns. The most striking thing about the US stock market today is not the individual movers, but instead the lead indicators and the bond market.
Lead indicators head lower
The two classic lead indicators for US stocks include the Dow Jones Transport Average and the small cap Russell 2000. The Dow Jones Transport index peaked on 13th October and has been falling since then, it fell through its 50-day moving average on Tuesday, which is a bearish sign and could signal further losses ahead. The decline in the Russell 2000 hasn’t been as steep, but it peaked on October 5th and sold off sharply on Tuesday as investors seemed to rush to ditch small cap stocks after yet another record high was reached.
These two lead indicators have not been able to muster enough strength to recoup recent losses, which could be a sign of investor fatigue further down the pipeline. If the selloff in these two indices continues then it is hard to see how the blue chip indices can sustain momentum as we move through November.
The bond market: a health check for stocks
The other warning sign could be coming from the 10-year bond yield. It has fallen more than 15 basis points since peaking towards the end of October. This is in contrast with the 2-year yield, which has been climbing over the same period and is up some 5 basis ponts so far this month. This has pushed the 2-10-year yield curve up to its highest level since 2007, which is typical in a market where the Fed has embarked on a rate hiking cycle, even this mild one that Janet Yellen started in 2015. Rising yields tends to mean woe for stocks, hence investors may now try to book profit instead of instigating fresh long positions as we move to the end of the year.
However, we believe that it is not as simple as rising yields spooking the market. The decline in the 10-year yield could also be relevant for stock investors, especially if it is a sign that the bond market has lowered its expectations for Trump’s tax plan and thus reduced long term growth expectations. If 10-year yields keep falling – and they are testing key support at 2.31% which is the 200-day sma – then it is hard to see how the stock market won’t follow suit and sell off on the back of tax reform stalemate in Congress. Thus, the Trump tax premium could come and bite markets on the proverbial.
Is tech the canary in the coalmine?
Tech is worth watching at this junction after massive gains so far this year. Already bond prices have started to fall for some of the major tech players including Apple, as more supply has weighed on bond yields. Is this a sign that the market could, finally, be falling out of love with tech?
What can the Vix and Bitcoin tell us about markets?
Before predicting market Armageddon, the Vix still remains below 10. Although it doesn’t usually stay low indefinitely, we want to see it move higher before confirming our fears about global risk appetite. Bitcoin is also worth watching. Before anyone can call it a safe haven we need to see how it performs in a sharp market sell off. So far this week it is down nearly $550, so if you are looking for volatility, bitcoin is the place to find it. It is hard to pinpoint the reason for the decline, maybe the market is getting nervous ahead of the upcoming fork later this month? Or maybe the market sees Bitcoin becoming mass market, both the CME and the CBOE are readying themselves for the arrival of Bitcoin futures, as a threat to its price gains? Who knows, but if traditional stock markets sell off, I will be watching to see how Bitcoin reacts and if it has any traits of a safe haven (recent price performance suggests not.)
What next for the oil price?
This week appears to be oil’s chance to steal the limelight. After surging to a high of $64.65 at one point on Tuesday, Brent crude lost $1 by session close as the market re-assessed the geopolitical risks that have propelled the oil price higher, while the fundamental picture remains unchanged. While we acknowledge that the price of oil cannot simply rise on the back of the Saudi anti-corruption crackdown, we still think that there could be some gas in the tank that could send Brent towards $70 – a key technical level - after all, the sharp increase in the price of Brent crude actually began in early October, well before talk of Opec production cut extensions and Saudi corruption purges.
Ahead today, economic data is thin on the ground, so we expect price action to take centre stage. On Thursday Brexit talks resume, this could lend some volatility to GBP, which has been one of the top performers in the G10 FX space so far this week.
With news that the performance of ICOs has been ‘nothing short of outstanding’, hitting average returns of 1,320%, here Laurent Leloup, Founder and CEO of Chaineum, discusses with Finance Monthly the prospects of ICOs in 2018, and the staggering capacity they have to make an investment golden.
First introduced in 2014, Initial Coin Offerings (ICOs) have seen a meteoric rise in 2017; resulting in $2.3 billion being raised to date as blockchain startups turn to cryptocurrency to raise funds. Typically described as a cross between an IPO and online crowdfunding using Cryptocurrency, an ICO requires an investor to contribute a certain amount of an existing token, such as Ether, to receive a share in a new currency at a set conversion rate.
As the popularity of ICOs continues to grow, it’s important that organizations understand the range of benefits, both for companies seeking investment and those looking to invest, the ICO model provides compared to traditional investment avenues.
Benefits of an ICO
For organizations looking for investment, an ICO is considered a much faster and easier fundraising method to undertake as anyone can start one. Additionally, the online nature of an ICO means that marketing and settlement costs are significantly lower than traditional fundraising with settlements finalized through the blockchain. This removes many additional costs that are associated with traditional investment which could incur legal fees amongst other expenses.
An ICO-funded startup also benefits from a network of supporters, similar to online crowdfunded businesses, whereby those supporters hold tokens that increase in value based on usage. Essentially, this means that an ICO-funded business already has a customer base in place and is in a stronger position to see faster growth.
As well as offering benefits for companies looking for investment, ICOs also have significant advantages for those looking to invest. Many investors are attracted to cryptocurrencies for their liquidity. Rather than playing the long game and investing vast amounts of money in a startup which could then see your investment locked up in equity of the company, ICOs offer the opportunity to see gains much quicker and can take profits out of the company invested in more easily.
An additional advantage of an ICO for investors is that it has the potential to remove geographical limitations seen with traditional venture financing which typically tends to be tied to global financial hubs such as New York, Silicon Valley or London. ICOs remove this restriction and opens up opportunities for anyone in any geography. This democratization essentially allows anyone to contribute and profit from an investment.
Furthermore, cryptocurrencies can appreciate much faster in value than standard currencies. For example, Bitcoin was worth just $100 in 2013 and in September 2017 was trading between $4,000-$5,000. As well cryptocurrencies from Blockchain startups Monero and NEM both saw huge increases in value at 2,000% increases. Therefore the potential ROI for investors using cryptocurrency is much higher.
What to look for in an ICO?
From an investment point of view, not all ICOs are created equal. Whilst there are apparent benefits to this new investment model, a number of poorly-managed operations have caused some concern within the industry towards the transparency and legitimacy of some ICOs.
However, previous successful ICOs have demonstrated that ambitious blockchain firms can achieve their objective in raising funds through this innovative new model. So what should investors look for when thinking of investing in an ICO?
Firstly, before considering investing in an ICO, it’s important to look for those that offer due diligence. There is currently no formal process to audit an ICO organization which means a company is able to start selling cryptocurrency tokens before a functioning product even exists. Understandably this has led some critics to comment on the legitimacy of some projects.
Before investing, it’s important to carry out a detailed analysis of the project, its objectives, and resource to gauge the likelihood of the project coming to fruition. In addition, the project should be able to provide regular operational updates on its status to ensure the investor feels confident with its progress.
As well as ensuring the legitimacy of an ICO through their due diligence, investors should look for an ICO with a certain level of transparency so they feel confident in their venture. Due to the nature of Blockchain technology, it can be difficult to identify who is purchasing tokens. This means that the true extent of the transaction is not quite clear. However, some blockchain platforms enable organizations to require and share personal information when making a transaction. Therefore before investing, it’s wise to consider the project’s Know Your Customer (KYC) measurements in place.
ICOs have seen rapid growth within the last year with more projects planned in the near future. However, for those looking to invest or launch their own ICO, it’s essential to understand how to navigate the ecosystem, including risks associated with the mechanism. Despite being a relatively new fundraising model, the rate at which they have grown in popularity means that we will continue to see more and more blockchain startups turn to the cryptocurrency community."
Vincenzo Dimase (@vincedimase), Head of Market Development, Trading at Thomson Reuters (@mifidii), gives an overview of MiFID II and the many different aspects of the financial market it will affect. Visit http://mifidii.com for more information.
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