Posted on February 24, 2020

GROW OR DIE. WHAT’S A DIGITAL MARKETPLACE AND WHO NEEDS ONE? PART 1 OF 2

Will your firm exist in three years? Joseph Schumpeter famously shared, “Situations emerge in the process of creative destruction in which many firms may have to perish that nevertheless would be able to live on vigorously and usefully if they could weather a particular storm.” 

Grow or die. Asset management firms have no choice in today’s highly competitive environment but to enthusiastically embrace technology as they seek to retain and grow assets under management. Competitive forces churn like the perfect storm to compress management fees closer and closer to zero, which only further increases the importance of growth. Institutional fund managers are increasingly choosing to use a tactic first implemented in the retail market, Digital Marketplaces, to retain and grow assets under management.

What’s a Digital Marketplace?

A Digital Marketplace, in the financial context, is a SaaS (Software-as-a-Service) solution that allows investors to access products that appeal to them, tailoring these products to specific demographics. Financial product marketplaces can be built for both institutional and private investors.  These financial product offerings can be various financial assets such as securities: equity or debt; or non-securities: borrower dependent notes, real estate, or other private investments.

Digital Marketplaces fall into three main categories when grouped by their target audience: Business-to-business (B2B), business-to-customer (B2C), and peer-to-peer (P2P). Financial asset marketplaces can belong to any of these three categories or even more than one at the same time.

B2B and B2C: Individual investors participating in exchanges with fund managers or corporate investors like trusts or pension funds interacting with fund managers. (Companies like Treasure, Assured Asset Management, and Unison).

P2P: Individual investors lending money to other individuals, or fund managers buying assets from other fund managers. (Companies like Lending Club and Dianrong)

 Who needs a Digital Marketplace?

Companies with financial products looking to scale their business, for example, fund managers looking to position their products to a wider audience. In a traditional way of doing business, these fund managers would operate by offering their registered customers investment opportunities when they release products. They would usually contact customers via email or phone and track interactions using a CRM using deals or opportunities pipelines.  This is effective when working with dozens of investors but fails to scale when it comes to hundreds or thousands of investors.

What are some business processes that Digital Marketplaces share?

1.       KYC/AML – KYC (Know Your Customer) is the process of a business verifying the identity of its clients, assessing their suitability, and evaluating the potential risks of illegal intentions towards the business relationship. AML (Anti Money Laundering) are processes required by regulations to prevent, detect, and report money laundering activities. Usually, both KYC and AML services are offered together as a single service by API vendors. Some examples include Giact, Lexis Nexis, Onfido, Middesk, and Identity Mind.

2.       Risk Management – Risk management is a necessity for conducting business efficiently, protecting the brand reputation and complying with regulations. These are usually custom-built processes that implement a specific risk model designed by the fund manager.  In most cases, risk management models are implemented on top of a rules engine. Companies like LogicManager or IBM OpenPages offer SaaS enterprise risk management solutions. 

3.       Digital Wallets – Marketplaces need a consistent way to track investor assets.  What’s the monetary value of those assets? And what’s the account balance for an investor? Opening a bank account for each investor will not be a cost-effective solution in most cases. The term wallet here is used as a ledger account and not in the context of cryptocurrency; however, both concepts are related. 

4.       Order Placement – This is the business process that occurs when an investor decides to take part in a certain investment fund or product. An efficient digital marketplace has to hold a single source of truth on what assets investors own. There can be multiple systems committing orders simultaneously. For example, call center agents can contact investors individually while the company investor portal accepts orders from web users.  In addition, the company can expose an API so other digital systems can place orders programmatically.

5.       Funds Transfer – Investors backing orders placed in the system, fund managers paying out dividends to investors or fund managers transferring capital to borrowers all require different types of money transfers. These are defined by cost, ease of use, and in some cases, regulations. Individuals may transfer funds using consumer APIs such as Stripe, Ingo to take credit card payments. For larger amounts or corporate transfers, sometimes ACH transfers are used integrating with APIs like Keybank or Galileo. 


Considering a digital journey, but don’t know where to start?  Read more in Part 2 of “Grow or Die- Introduction to Starting the Digital Journey.”