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Retail Trading Ripe for Fintech Disruption

The monopoly that banks have traditionally held on their customer account information and payment services is weakened. This opens the way for these parties to build financial services on top of banks’ infrastructure.

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Start-ups in the capital market space are a small part of the fintech world but find multiple opportunities to disrupt retail trading.

There are currently around 8,000 fintech start-ups globally, revolutionising lending, retail banking and banking processes.

But less than 10 percent are in the capital markets space and an even smaller segment in retail trading. They also receive a disproportionately small amount of funding, roughly 4 percent of the US$96 billion of venture capital funding.

Although they are currently a small segment, retail trading fintech firms are rising fast and are likely to accelerate a rush of entrants into the space, according to our report, Fintech and The Disruption of Retail Trading: Trends and Case Studies.

Based on an analysis of disruptive fintech firms and interviews with more than 20 fintech start-ups and subject matter experts, we found multiple drivers that present huge opportunities for these players.

Firstly, the growing sophistication of big data and visualisation tools helps consumers to monitor and source deals online, easily access data and trends through AI and machine learning tools. They use real time dashboards that track their wealth. Retail investors demand online platforms to source trading strategies, help them analyse potential trading opportunities and execute trades at a low cost.

Secondly, major changes in pension schemes around the world, such as shifts from defined benefits to defined contributions, puts more investment capital in the hands of retail investors who need to balance short-term with long-term investing.

Thirdly, regulatory changes, such as PSD2 in Europe, enable both consumers and businesses to use third-party providers to manage their money.

The monopoly that banks have traditionally held on their customer account information and payment services is weakened. This opens the way for these parties to build financial services on top of banks’ infrastructure.

Fintechs to watch

In our report, we identified fintech firms we believe are exhibiting disruptive potential by attracting new target segments through better user experiences and interfaces, leveraging cutting-edge technology and democratising trading tools and data.

There are several types of fintech firm that embody these traits, which we categorise into the following:

  • Robo-advisors 1.0 are firms that rely on user-friendly platforms to create smooth experiences, often attracting millennials who don’t have experience trading in capital markets. They keep costs low by offering algorithm-based advice and investing in passively managed ETFs or stock indices. Some even offer zero-cost brokerage fees and profit instead by charging interest on margin trading.
    One example is 8 Securities, Asia’s first $0 commission robo-advisor service. Their target user is 37 years old, has US$100,000 in assets and typically wants to allocate around 75 percent to the market while keeping 25 percent in cash. Some 90 percent of their users are passive investors and use their robo-advisor enabled app. The company currently has US$1 billion in turnover and is used in 60 countries.
  • Robo-advisors 2.0 enable more sophisticated trading strategies and analytics, such as alpha generation/smart beta strategies, algorithmic strategies and…

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