Home Finance The future of financial markets: capital creation re-imagined

The future of financial markets: capital creation re-imagined

by jcp

By SIX, the Swiss Exchange 

Accelerated by the pandemic, the financial services industry has been confronted by a number of never before seen changes that will impact the way it functions going forwards. These range from technological trends such as digitalization, new payment methods and Blockchain/distributed ledger technology (DLT) to more societal ones like growing investor and regulatory pressure to become more sustainable, prompting more financial institutions to consider the ESG impact on their lending and investment decisions. Coming out of the pandemic, questions emerge about how these changes will affect the industry permanently, and what the future of the financial industry will look like.

Undoubtedly, the industry will evolve into a new normal.  SIX, the Swiss Exchange, in collaboration with students from a Business Innovation master’s course at the University of St. Gallen outline their predictions for the industry based on the trends that have emerged from the pandemic, as well as a proposed solution to address new industry needs in the face of changing demands.

Industry developments and trends

The future looks somewhat bleak for regional and savings banks in Switzerland and beyond, as unlike larger, nationwide banks, they lack the range of value propositions and may not survive the digital change. It is increasingly important for the small players to differentiate themselves and offer new services – for example, Hypothekarbank Lenzburg launching the Finstar Open Banking platform.

Another important development to consider is blockchain, DLT, and tokenization. These will enable a common database to be created in the future, eliminating the need for specialized intermediaries or third-party infrastructure. Through tokenization, assets whose values are difficult to quantify can also be traded commercially. Technologies such as DLT and digital assets will have a crucial role to play in facilitating capital raising and investment. Through DLT-enabled FMIs, previously illiquid assets could be tokenized, allowing them to be more easily traded and settled. This will facilitate greater liquidity and help drive capital inflows into less liquid securities such as SMEs or tangible assets such as art.

The needs of the end consumer must also be taken into account. Sustainability is becoming an increasingly important priority for consumers, and SIX has seen this reflected in demand for sustainable investment opportunities in small and medium-sized enterprises. The social, environmental, and governance dimensions of capital creation have therefore become a key factor for businesses to consider. However, there are serious deficiencies in the current ESG rating process, making it difficult for investors to integrate ESG metrics into their decision-making processes. Data underpinning ESG ratings is often subjective, meaning that different ratings agencies frequently take contrasting views when scoring companies. The lack of a taxonomy has compounded this problem further. The current sustainability ratings are also based on historical data and often only request reports on certain topics. As a result, companies in almost every industry except tobacco and weapons can receive a good rating.

SMEs and start-ups are particularly disadvantaged by the current ratings system as they are less able to afford to invest the time and effort into obtaining the various reports. This is problematic as SMEs, responsible for over 70% of global employment and 50% of GDP, represent the global economy’s backbone. They are central in promoting capital creation, and so supporting innovative and sustainable SMEs and start-ups is crucial for a sustainable future.

The solution: the Impulse Marketplace

Taking these industry demands into consideration, SIX and the University of St. Gallen have proposed the creation of ‘Impulse Marketplace’, designed to be the leading platform provider for responsible finance by connecting sustainable SMEs and start-ups with global investors who aim to support real sustainability. A combination of a holistic approach, and sophisticated data tools for validating information could be used to assess business sustainability and therefore suitability for the platform.

While such an investment platform could be the answer to facilitating sustainable capital creation, regulators and a possible future platform provider would need to address several challenges. First, there is the question of how to govern and regulate such a unique, international platform that serves capital seekers and providers worldwide and establishes the necessary standards without real competition. Related to that, there actually needs to be an institution that determines the ESG requirements the platform enforces. Existing exchange providers worldwide might have or can set up the technology and process-related capabilities necessary for the platform’s selection, registration, and marketplace functions. However, they may not wish to, or be adequately suited to taking on the responsibility for assessing the sustainability ratings of different companies. Instead, government(s), NGOs, or even the investors themselves could take that role.

Another challenge lies in the quick provisioning of financing needed for making timely investments. Technology and processes need to be designed to satisfy legal and risk management aspects such as the identification of both economically sound, and sustainable companies. However, if we can address these challenges, there would be an opportunity to overcome the international political disagreement regarding appropriate sustainability measures and replace it with a business-orientated approach, creating capital for and through SMEs, investors, stakeholders, and the platform provider.

The financial industry’s future will be shaped primarily by players such as fintechs and the major technology giants, who will need to put sustainable capital creation at the forefront of everything they do.  New business models will be needed to drive these changes, and collaboration as well as ease of access and use will be central to these models. From fully embracing emerging technologies to making investment in sustainable, unlisted SMEs worldwide accessible via a single platform accessible for all, the proposed Impulse Marketplace is a perfect embodiment of the new customer-centric, sustainable normal that is needed for the future of the financial services industry.


You may also like

This website uses cookies to improve your experience. We'll assume you're ok with this, but you can opt-out if you wish. Accept Read More