FinTech and Big Data: Technological innovations shaping the investment fund industry

Technology and big data are radical transformational forces across all industries. Their impact does not stop at the fund industry as they fundamentally change the way investors interact with service providers. They create opportunities for innovation in service delivery and have the potential to enhance the customer experience for a new generation of investors. The past years have seen remarkable progress in FinTech research and development, and numerous initiatives have gotten underway to help asset managers develop business models fit for the future.

Asset managers will expect their fund centre partners to not only keep pace with them, but to push ahead in adapting their practices, products and services to their clients’ needs in an era of global, digital distribution.

Investment fund industry actors have long relied on FinTech in many areas ranging from custody and administration services, fund accounting and transfer agency, to reporting, clearing and compliance – to name but a few. Now, younger technologies such as big data analytics, artificial intelligence and distributed ledger technology or DLT (including blockchain) have also resulted in new areas of FinTech – cue digital investing or robo-advice, although largely in the fledgling stages.

As has been the case with automation, FinTech solutions represent an opportunity to improve efficiency and reduce cost in asset management and may pave the way to new products and distribution channels, benefitting the investor and the wider industry. Skilfully harnessed, FinTech can fix the issue of systems patchworks and can streamline and simplify all too often tangled workflows and bring transparency to performance measurement.

Some of the most promising examples of use in Luxembourg are the following:

The aim in the context of anti-money laundering (AML) and Know-Your-Customer (KYC) requirements is a shared processing model, with a concerted approach to investor screening and its documentation, eliminating duplicate efforts and inconsistency. Blockchain, alongside other examples of distributed ledger technology (DLT), is in the spotlight in relation to end-to-end shareholder transaction processing. In addition, asset managers will be able to interact directly with investors via third-generation fund platforms, combining robo-advice, trading, settlement, aggregated shareholder reporting and objectives-based performance tracking with the facilitation of social investment and participant forums.

Luxembourg, as home to the largest fund industry in Europe, is active in the domain of blockchain solutions around transfer agency and distribution. Fundchain, launched in 2016 by Luxembourg startup Scorechain, aims at exploring the potential of blockchains for the fund industry. In 2017, a number of major financial institutions joined the initiative, with participants now including BIL, BNP Paribas Securities Services, CACEIS, Brown Brothers Harriman, European Fund Administration (EFA), HSBC, ING Luxembourg, Pictet, RBC Investor & Treasury Services, Société Générale Bank & Trust, PwC Luxembourg, Schroders, SWIFT and the University of Luxembourg.

FundsDLT is another key initiative in the realm of asset management aimed at exploring the potential use of blockchains, including AML/KYC solutions. In July 2017, Natixis Asset Management completed a first real blockchain transaction in fund distribution via this platform, developed as a new distribution channel that saves asset managers and service providers time and money.

Infrachain is an initiative developed at national level that intends to build an infrastructure layer of blockchain technology to be used for pan-European projects. Infrachain’s purpose is to foster a trusted and sustainable operational environment for blockchain solutions managed out of Luxembourg. Created as a non-profit organisation in May 2017, Infrachain has been a one-of-a-kind initiative and strives to become a large European node network with hundreds of host operators all over Europe.

Luxembourg is also at the forefront in terms of RegTech solutions looking to gain efficiency and enhance automation in certain regulatory processes such as transaction reporting.

We are also beginning to see an interest in creating funds that invest in cryptocurrencies, using blockchain-based target operating models that may dramatically change the asset servicing scene.

Robo-advice currently remains limited by regulatory issues. Hopes are that an enhanced regulatory framework as a result of UCITS V, MiFID II and GDPR, will boost robo-advice by making it safer for investors.

Communiqué par François Drazdik, Head of Administration, Association of the Luxembourg Fund Industry (ALFI)