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Reaching a new generation of investors with a plug & play digital experience

17 Jun 2021

Reaching a new generation of investors with a plug & play digital experience

A transformation is under way in the fund distribution market, with major players moving quickly to implement new technologies such as blockchain to reduce costs and other inefficiencies. This will create a new market infrastructure making it easier for the industry to serve a wide variety of clients, and to reach a new generation of investors with a plug & play digital experience.

To learn more, we spoke with Pierre Mottion, Head of DLT (Distributed Ledger Technology) & Strategy Investment Fund Services at Clearstream in Luxembourg.

Can you describe the challenges of the current market environment?

The challenge of fund distribution today is to ensure that asset management firms are delivering the right value to their client base for the right price and making sure it properly remunerates the intermediaries.

There's a lot of market fragmentation across the European investment funds industry, in terms of products, distribution channels and intermediaries, which leads to process inefficiencies and higher fees than in the US for example. The question is whether investors and asset managers are finding value for money in each of these intermediaries, or whether we can build a solution providing a cost-efficient and large-scale service model with the right level of granularity and controls required by the industry.

Asset managers are increasingly being challenged by their clients who have access to other investment strategies, just as smart, perfect and successful as their own, but maybe cheaper. This is specifically the case of the new generation of investors who have access to digital solutions outside traditional distribution channels.

How can new technologies address these challenges?

Distributed ledger technology (DLT), such as blockchain, is the easiest way to shorten the transaction cycle, reducing the number of intermediaries, having the product directly available to the end investors. Using such infrastructure, intermediaries can focus on their core value proposition: advice for distributors, settlement and asset servicing for banks. And this is clearly the great benefit of blockchain when it’s combined with trust, network and volume.

The second element we can derive from blockchain is data, for both the investor and for the asset manager.

The granularity provided by the blockchain is allowing unrivalled transparency of information, allowing the provision of the right information to the customer so that he or she can make the right investment decision or allowing asset managers to better understand their clients’ behaviour.

What does distributed ledger technology (DLT), such as blockchain, offer the fund industry?

At the moment, we have multiple registers and sub-registers to establish proof of ownership. In the blockchain, you can demonstrate this at any time at the most granular level.

Blockchain adds a level of automation, which is so important in our fund industry today, because we still rely too much on reconciliation. Blockchain lets you skip that because you only have one source of truth, which brings efficiency and cost reduction.

Some market participants are also facing issues with their legacy technology, and the question quickly comes to identify how to upgrade or replace this legacy and how to build new client-centric solutions. Leveraging a new technology infrastructure, such as blockchain, for the fund business is clearly the right way for the market participants to develop their services.

The regulatory environment is also a very important element to take into account, and supportive legislation is needed, like Europe’s MICA regulatory framework for crypto assets.

How does Clearstream’s investment in FundsDLT accomplish this transformation?

FundsDLT, based in Luxembourg, aims to connect investors and asset managers by digitising fund distribution operations through a market infrastructure based on distributed technologies. 

Clearstream complements and adds value to FundsDLT in several ways. As a shareholder, we bring financing. As a business partner, we also bring our expertise, market reach and network.

We are helping our own clients with their digital transformations. We recently showcased this with Zürcher Kantonalbank (ZKB), a Clearstream customer who wanted to interact better with its own end customer base, through Clearstream and FundsDLT technology and services.

What is Clearstream's position on digital fund distribution?

We are just at the beginning of the journey for digital fund distribution. We aim at building a digital fund infrastructure and the appropriate ecosystem for streamlining the interactions between fund managers and investors. This ecosystem encompasses a broad range of services with distribution support, execution, settlement, asset servicing, issuance and data, and the integration of partners such as FundsDLT.

The article was first published in Delano & PaperJam on 17 June 2021.

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