Embracing data’s disruptive powers to democratise financial markets

Democratising financial markets is essential to achieve financial inclusion, and fintechs can play a key role.

Conversations and research on the transformative forces of modern technology have dominated the finance industry for years. However, the true potential and scope of digital tools to revolutionise capital markets are only now being explored with urgency. This is as expertise improves when incumbent financial services providers cooperate with fintech firms to develop original frameworks to integrate technological sophistication.

These themes were explored by Standard Chartered in a virtual conference on the Digital Transformation of Financial Markets in December 2020. The event brought together a variety of practitioners to weigh in on the importance of AI, data, automation and accessibility.

Standard Chartered believes that the fintech sector’s contributions to deepening and broadening participation in financial markets will democratise the ecosystem. The goal is to democratise flow of capital by encouraging greater inclusion from a diverse range of borrowers, investors, lenders, intermediaries and other service providers. One major beneficiary of this trend is small and medium-sized enterprises (SMEs), for instance.

Giving SMEs the platform they deserve

When reviewing the operations of capital markets at the global and regional levels, it’s often easier to focus on larger, well established, well banked corporations, given their obvious influence. But established capital market practices are often not able to cater to SMEs despite their integral role to the economy, especially in the developing world.

According to the World Bank, SMEs represent about 90% of businesses and more than 50% of employment worldwide.1 In China, for example, the number of SMEs and micro enterprises rose 115 percent in the 2014-2018 period. Those enterprises had a workforce of around 233 million people in the country.2

Yet, access to financing remains a key constraint to SME growth, noted Ankur Prakash, Chief Operating Officer for Credit at Standard Chartered and one of the moderators of the discussion. “They are underserved by banks and financial markets. The pandemic has made it apparent that we need to solve this SME funding problem,” he said.

Democratising financial markets

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The first step is recognising that SMEs aren’t monolithic – there’s no one-size-fits-all methodology. Consequently, detailed data analysis is vital to better evaluate each organisation’s unique credit requirements. But that comes with the added challenge of collecting quality information from SMEs, which is a hugely complex task due to their limited resources and fragmented datasets.

Acknowledging these barriers, though, is part of the process of finding a solution. For Weili Chen, Head of Commercial ABS at Standard Chartered and co-moderator of the session, the move towards standardised metrics among SMEs will gradually facilitate securitisation and channel liquidity to these enterprises.

“Securitisation will be a promoter of the development of credit and the adoption of credit. If you look at the experiences around the world, SME securitisation is relatively small, so something needs to happen,” he said. “I’m hopeful that fintechs and data automation can help measure SME credit risks when putting together portfolios.”

Turning financiers into data scientists

While the panel agreed that data was becoming the lifeblood of capital markets, they also noted that its raw form wasn’t helpful. Data must be refined and examined to properly meet the needs of end-users. As a result, more investors need to reskill themselves to work with models based on artificial intelligence and machine learning to make decisions. Technology and data enable automation, cost reduction and accessibility.

Data science will be an enabler in opportunity matching between investors and issuers. The funding market needs more apps and platforms that are going to be able to generate transparent matching alerts at scale. These would be machine learning algorithms that make predictions based on features, such as the size of an issuer’s balance sheet and their credit rating, and an investor’s portfolio profile and risk appetite.

Data science will support democratisation by breaking down information hierarchies so that everybody has access to the same data and the same opportunity to analyse it and come to conclusions.

Although the advantages are evident, choosing which fintech to pair up with to craft these tools isn’t always straightforward. The proliferation of fintechs means a bigger selection of niche and specialised business innovations are on offer, but it remains important to find the right partner.

The panel concluded that market participants must nurture an ecosystem of collaboration to make genuine progress in this area. The potential of technology to transform and democratise capital markets is substantial, but it will take more partnerships and a broader role from asset managers, regulators, banks and so on to bring this to fruition. And, of course, customers must be at the heart of whatever systems and platforms are being built.

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