Digital assets are digital representations of financial assets that can be traded, stored, and managed electronically. They have been gaining traction and are revolutionizing the finance sector.
What Does Digital Asset Mean Today?
Digital assets allow investors to access a wide range of financial products, from traditional stocks and bonds to cryptocurrencies and other alternative investments. The digital asset revolution has also led to several overdue innovations in the finance sector. These include the use of blockchain technology, which has enabled the creation of digital tokens and digital assets. This opens up the possibility of creating digital tokens backed by a variety of assets, such as stocks, bonds, commodities, and more.
Additionally, digital assets have enabled the creation of many innovative financial products, such as decentralized exchanges, lending protocols, and stablecoins. These new protocols allow for the creation of financial products that are not subject to the regulations and restrictions of traditional financial institutions
Finally, the introduction of digital assets has enabled the emergence of a new asset class, tokenized securities. Tokenized securities are digital representations of traditional financial instruments, such as stocks, bonds, and other securities. These instruments can be exchanged, stored, and managed on the blockchain, allowing investors to access a wide range of financial products.
Revolution In The Finance Sector
Digital assets are revolutionizing the finance sector and are leading to overdue innovations. From blockchain technology to tokenized securities, the finance sector is being transformed and is creating new opportunities for investors. As digital assets continue to gain popularity, they will continue to drive innovation, create new opportunities, and revolutionize the finance sector.
The finance sector has seen a revolution of sorts in recent years, with the emergence of digital technologies and the widespread adoption of innovative solutions. These changes have led to a transformation of the industry, with new services and products becoming available to customers and businesses.
The advent of digital technology has enabled banks and other financial institutions to offer faster and more efficient services. With the help of mobile banking, customers can now access their accounts from anywhere and at any time. Additionally, banks have implemented solutions such as artificial intelligence and machine learning to enhance the accuracy of their services and reduce the risk of fraud.
Factors Spurring The Financial Sector Growth
The growth of the fintech sector has been a major factor in the revolution of the finance industry. Fintech companies are using innovative solutions such as blockchain and cryptocurrencies to revolutionize the way money is handled. These solutions are helping to reduce the cost of transactions, provide more transparency, and enhance the security of financial data.
In addition to these changes, the finance sector is seeing the emergence of new business models, such as peer-to-peer lending and crowdfunding. These models are enabling customers to access capital without going through traditional banks.
The revolution in the finance sector has also enabled businesses to access new sources of financing. For example, venture capital and private equity are providing businesses with access to funds that were previously unavailable. Read more about the crypto coins and digital assets that revolutionize the modern finance world.
In Summary
The revolution in the finance sector has been beneficial for both businesses and customers. Companies have been able to access new sources of capital and customers have been provided with faster and more efficient services. The modern financial world has massively grown with the realm of digital assets.
“Banks have responded to this new paradigm, digitising their processes by leveraging and making decisions based on data and analytics, and shifting their focus on consumer experiences that go beyond mobile and online”, says Rosanna Woods, UK Managing Director at Drooms. “They have realised that to remain competitive and maintain market share they need to be more strategic and technologically adept, recognising the need to invest in automation, core modernisation and digitisation.” Below, Rosanna tells us why a collaborative approach is the way forward.
The changing landscape of investment banking
2019 is proving to be a momentous year for the global investment banking industry as it returns to normalcy in terms of profitability and capital adequacy. Global M&A activities, mainly by large US banks, are creating opportunities to expand overseas and acquire FinTech startups.
Today, most investment banks are enthusiastic about digital transformation initiatives to reduce costs and improve customer experience. Although investments banks adhere to their conservative business model, digitisation has shifted power to investors, who favour partnering with banks that are digitally more advanced.
Opportunities amid regulatory challenges
In Europe, the introduction of wide-ranging regulations has also impacted the working environment for banks. For example, the Second Payment Services Directive (PSD2) has encouraged innovation and competition between incumbents and FinTechs, while implementation of the revised General Data Protection Regulation (GDPR) framework has given EU citizens comprehensive data protection, forcing banks to ensure the privacy of customers’ data.
While addressing the myriad requirements of these new and contradicting regulations makes data management more daunting for banks, the major challenge for most of them is that data is being managed in siloed and disparate systems, making it all the more difficult to understand clients’ needs and demands.
Today, most investment banks are enthusiastic about digital transformation initiatives to reduce costs and improve customer experience.
However, the good news is that more banks are recognising the capabilities of cognitive technologies in gathering intelligent insights on customers, compliance and operations making collaboration with FinTechs more attractive. Also, robotic process automation (RPA) is rapidly gaining popularity as it brings productivity benefits to the table.
Helpful technology
The advent of Artificial Intelligence (AI) has been particularly helpful for banks in processes including client servicing, trading, post-trade operations such as reconciliations, transactions reporting, tax operations and enterprise risk management.
While much of the media attention towards AI has focused on its potential capacity to replace humans, at present it is seeing much more practical use in terms of complementing human intelligence. ‘Augmented’ intelligence involves machines assisting humans in their decision-making processes.
A sub-field of AI – Natural Language Processing (NLP) is a good example of augmented intelligence in practice. NLP systems are designed to read and interpret human languages. A key application of this in relation to banking is the analysis of substantial amounts of ‘unstructured data’, which is data that as yet cannot be ‘read’ by machines, such as PDF files, images and audio materials.
Banking is a data-intensive sector and many key tasks demand correct interpretation of partly structured data. Therefore, NLP has the potential to make processes much more efficient with less effort required from humans. As such, FinTechs have been quick to apply this technology because of its value in improving customer interactions, making collaboration with them attractive for most banks.
The advent of Artificial Intelligence (AI) has been particularly helpful for banks in processes including client servicing, trading, post-trade operations such as reconciliations, transactions reporting, tax operations and enterprise risk management.
Role in M&A
Technologies such as virtual data rooms (VDRs) come into their own for banks when used in M&A deals, helping to address many of the challenges such pursuits face even at the best of times. There are several key causes of failure, including politics around the deal, culture clashes among the personnel involved and, in particular, parties being unprepared for the due diligence phase. In this latter regard, M&A deals rarely fail because of a lack of knowledge. Rather, it is about how that knowledge is handled. Over half of deals fail because those parties involved are reluctant to confront issues head-on.
Buyers often proceed with deals despite the challenges because they feel obligated by the amounts of time and money involved. They should, however, be prepared to cut their losses if the risks outweigh the benefits. For example, allocating inadequate resources during the review stage cost Bank of America $50 billion in legal fees post its acquisition of Countrywide Financial in 2008, let alone the reputational damage it suffered for inheriting the past mistakes of the mortgage lender.
A VDR enhances the M&A process by increasing the power to collect, process and distribute information to the right parties with much greater security and accuracy. It digitises relevant documents, automates tasks and streamlines workflows.
Authorised users, including those inside a company and their external stakeholders, are connected digitally and in a secure environment with real-time access to all relevant documentation, depending on users’ individual permission levels.
A VDR enhances the M&A process by increasing the power to collect, process and distribute information to the right parties with much greater security and accuracy. It digitises relevant documents, automates tasks and streamlines workflows.
Creating a database in which documents can be updated consistently gives asset owners full control and the ability to react to the latest market conditions, bringing assets to market quickly when the conditions are right, sometimes at short notice.
One of the strengths of the Drooms NXG VDR is its Findings Manager function. This improves the vendor due diligence both prior and during the sales process. It allows for the automatic pre-selection of documents and helps in the assessment of potential risks and opportunities within a transaction. This yields greater control, instils confidence in potential buyers and cuts disruption to existing business.
Blockchain first
Macro forces such as blockchain are also slowly revolutionising many areas of banking. For example, blockchain made it possible to automate approvals of contracts as well as protect the transfer of confidential data from hackers and fraudster whenever transactions are made. In 2018, Drooms became the first provider to move its VDR offering into the blockchain age, using this modern technology to enhance the security of transaction data archives. Up to that point, all data had been stored on physical data carriers following completion of a transaction. But now it can be stored on Drooms’ own servers with blockchain protection. As a result, the secured data cannot be lost, is non-manipulable and is accessible to all parties involved in a transaction at any time.
A new threat
As more financial institutions start to adopt technologies created by FinTechs, a likely threat is emerging. Tech giants such as the likes of Amazon, Alibaba, Apple and Google are attracting customers in the payments domain by offering alternative ways of managing finances. In the US, Amazon is already offering its customers the option to turn spare change into gift cards, and parents can also give children their allowances via a reloadable debit card for example. In India, customers pay delivery fees through a Cashload feature and store excess cash from previous purchases in their account, as well as deposit money for future orders.
With platform companies’ potential to exploit customer data and come up with innovative solutions to address customer pain points, there is a lingering risk of disintermediation for banks. Customers who feel that tech companies alone meet their banking needs may decide to switch to non-banking channels. And there is also the possibility that tech giants may provide banking services in the future, making services provided by banks non-exclusive. Although big techs pre-dominantly target the origination and payments domain of banking, a stronger foothold by platform companies could threaten the survival of many banks in the industry.
Towards modernisation
The various areas of the banking industry will undoubtedly continue to evolve at varying speeds. And as time progresses more banks will likely partner with innovative FinTechs to remain competitive and market relevant. Potential for creative and ground-breaking collaborations and advanced modernisation will also likely increase.
That said, as technology transforms the future of banking, so ought banks’ mindset towards cognitive technologies and collaboration with FinTechs. After all, technology is not a panacea and it is accompanied by many challenges as well as opportunities.
The UK’s Financial Conduct Authority (FCA) and the Hong Kong Monetary Authority (HKMA) have entered into a Co-operation Agreement (Agreement) to foster collaboration between the two regulatory authorities in promoting financial innovation.
According to the Agreement, the FCA and the HKMA will closely collaborate on a number of initiatives such as referrals of innovative firms, joint innovation projects, information exchange and experience sharing, to facilitate financial innovation in the United Kingdom and Hong Kong.
For the UK this represents the fifth co-operation agreement that the FCA has signed with international authorities after Australia, Singapore, South Korea, and China. The FCA has an overarching statutory objective as a regulator to make financial services markets work well and promoting competition through innovation forms a significant part of this. The Co-operation Agreement with the HKMA will reduce the barriers for authorised firms looking to grow to scale overseas and assist non-UK innovators interested in entering the market the FCA oversees.
For Hong Kong, the Agreement is a key initiative of the Fintech Facilitation Office (FFO) of the HKMA. It presents significant opportunities for financial and fintech companies to enhance their services and extend their global footprint. The Agreement also shows the HKMA’s commitment to build a vibrant fintech ecosystem.
Christopher Woolard, Executive Director of Strategy and Competition at the FCA, said: “Alongside promoting innovation in UK businesses, we also want to see the best firms from around the world coming to the UK. Both consumers and the wider UK economy benefit from this transfer of ideas and innovation. The Agreement signed today with the HKMA is a good example of this type of international co-operation and we look forward to working to promote innovation and reduce barriers to entry for firms both here in the UK and in Hong Kong."
Mr Shu-Pui Li, Executive Director (Financial Infrastructure) of the HKMA, said: “We are delighted to sign the Agreement with the FCA. Both Hong Kong and the UK are well positioned as global financial centres and premier locations for financial innovation. Many fintech firms and financial institutions in the two markets have already gained a solid local footing. Collaboration between the HKMA and the FCA will create significant synergy for the two markets by enabling fintech firms and financial institutions to extend their global reach and learn from their foreign counterparts. It will also help to enhance services delivered by financial institutions.”
The Agreement was signed today at the London-Hong Kong Financial Services Forum in London, an annual forum facilitating discussion on financial cooperation and development between the UK and Hong Kong.
(Source: FCA)
