EVERYONE TALKS ABOUT fintech these days and invariably you hear the line “banking’s about to have its Uber moment”, referring to the point in time when that particular mobile phone application caught on – to the delight of drunken stop-outs everywhere and the chagrin of the taxi driving professional.
Fintech hype is so ubiquitous that I’m reminded of the days of the dotcom bubble and the run-up to one of the messiest sectoral equity market corrections ever seen. And as with any market bubble, the charlatans and criminals are out in force trying to make a quick buck.
China has just experienced the world’s biggest fintech fraud involving a peer-to-peer lending scam that bilked investors out of more than US$7bn by promising returns of between 9% and 14%.
That particular ponzi scheme kiboshed China’s fintech IPO pipeline as the financial authorities clamped down, to the extent that those fintech entrepreneurs looking to monetise their efforts in the stock market are resorting to backdoor listings via shell companies.
Indeed, this little business model has created something of a bubble of its own: you just can’t buy the damn shells at a convenient market cap any-more because they’ve already been snapped up for backdoor listings.
But what about fintech in the bond markets (and here I’m thinking specifically about Asia)? I know quite a few former investment bankers who have moved into the fintech start-up arena with an eye to doing an Uber on fixed income. Well alright, not quite that radical a plan, but they reckon there’s good money to be made from a bit of disruptive behaviour in the bond field.
I’m tempted to remember those “eat what you kill” brokerages that blossomed in Asia soon after the global financial crisis hit in an attempt to capture the money lying between bid and offer in what had become a profoundly illiquid market.
IT’S SOMETHING SIMILAR this time around, which is not to downplay the leaps that technology and its ubiquity have made since the crisis. But there’s no doubt the illiquidity of secondary markets that has resulted from the straitjacket of regulation – whether it’s Dodd-Frank limitations on bond warehousing at the banks or Basel III demanding ever more capital on bank balance sheets – has got the fintech nerds on overdrive.
And this illiquidity comes at a time when there are more and more bonds out there thanks to the low interest rate central bank experiment. What bond markets seem to be crying out for is a platform that can match buyers and sellers with firm pricing at whatever size you want, such as is available in the major equity markets.
That was the idea with Bondcube, which was set up by an ex-Citigroup trader in 2012 and went into liquidation last year. The founder noted that although the company was able to match sellers with buyers, little volume actually went through.
Other fintech companies are looking at private placements or odd-lot bond trading via electronic platforms. On these two projects I can only say: good luck. The thinking with the first idea is that the process as it exists now is too work and documentation-intensive. Streamline that and you’re onto a winner, so the thinking goes.
But I’m not sure how it would work differently from how it does now. I suppose potential issuers can advertise their term funding levels (many do already on Bloomberg and Reuters) and size range on the platform, and the buyside customer can push a button to declare interest.
A few more clicks and you’ve bought yourself a private placement. But why is anyone going to bother? In the first place a large number of issuers want to keep their term funding levels to themselves.
BANKS ARE PAID for discretion and if there is to be an electronic system to get around this I can’t quite see how it would work. Is the potential issuer mentioned by name? Or if anonymity is sought, will just a credit rating, a sector and some ratios do? And what about the buyers? Are they fast money flippers or do they really buy and hold?
Odd-lot trading might be something that could work in Asia, given the depth of the region’s private banking industry and the willingness of its clients to trade frequently.
But again I’m not too sure how it would work to make it a worthwhile proposition for the platform provider and the end-user. Too little commission and it won’t be viable unless cumulative trading volumes are huge. But free floats on bonds are often small and the risk of trade failure high for both sides.
And of course, another element missing from both concepts is the idea of a bank as the provider of ancillary efficacy. There are plenty of times when a bank trader will do a client a favour by buying an illiquid bond at an above market price if there is solid business to be had from them elsewhere. It’s tough to create an algorithm that captures the essence of that.
I reckon the billions spent on fintech investment over the past few years might produce decent returns on the peer-to-peer and research sides. But I don’t see it supplanting the way business is done in the bond markets so that it’s an industry disruptor. The only Uber moment for bond markets in Asia is likely to come from a taxi ride in the early hours from a backstreet in Wanchai.
