Investing, almost by definition, has always been something that requires money. Lots of money. The barrier to traditional investing has kept huge chunks of the population out of finance and technology markets. For a long time, if you weren’t a hedge fund, or a client of a hedge fund, there wasn’t an easy way to jump on the latest Silicon Valley tech startup, at least not before its IPO.
These days, however, we have a little something called fintech: a portmanteau of ‘financial technology’. Fintech covers a huge gamut of services and technologies (technically it’s any tech that helps innovate or improve the financial sector) but in this article we’re looking specifically at investing and equity crowdfunding. Two things that have huge flow-on effects for innovation, economies and entrepreneurs.
Welcome to the fintech evolution
For a long time, investment had a fundamental problem: it only seemed to make sense for people with a lot of money, or a lot of knowledge, or both. There was no easy, cost-effective way for mom-and-dad investors to jump on the latest unicorn and ride off into retirement. And the figures tend to bear this out: according the US Federal Reserve stock ownership is still dominated by the wealthy, with families in the top 10% of income band holding 70% of the value of all stocks.
But one of the fundamental achievements of fintech has been offering regular investors low-cost opportunities to get some skin in the game. Apps like Raiz, Robinhood, StartEngine, Crowdcube – along with small-ish, hybrid VC-crowdfunding firms like Airtree and Blackbird, also known as “micro VCs” – give regular investors exactly what they need to bridge the gap: access (in the form of low-cost buy-in and minimal fees) and knowledge (in the form of ‘robo-advisors’ and algorithmic diversified funds).
On many of these platforms, investors can start with whatever spare change they have lying around. They simply need to pick their sector, their risk appetite, their growth targets, and the algorithms will do the rest, funneling their money into ETFs or startups that fit a given criteria.
Fintech vs traditional investments
In a traditional investment structure, entrepreneurs seek funding from VC firms, angel investors or institutional investors with deep pockets. There’s the pitch, the formal presentations, the due diligence, the long nights etc.
With fintech, startups can raise money the old-fashioned way, or directly from individual investors. Equity crowdfunding platforms like SeedInvest, Indiegogo, StartEngine and Mightycause enable a broader range of investors to start dabbling in tech stocks and give entrepreneurs more granular control over the pre-seed stage.
These are all good things, and some would say long overdue. Diversity leads to competition, and competition leads to improvement, or so the capitalist theory goes.
Does this mean that traditional wealth management and investment firms face extinction? Not really. It’s more likely that the two investment ecosystems will live side-by-side, borrowing features from each other to refine their product offering. Just look at the track record of hedge funds in 2023, when billionaire fund managers like Chris Hohn and Ken Griffin led the industry to record profits: a cool $67 billion right off the top.
The big question is one of risk and trust. In investment circles, they’re both assets, and traditional wealth management firms are still holding the chips here. They’re more well known, have an established track record, and their investments (while not infallible) are based on human insight, large data sets, and expertise – not ‘robo-advisors’.
“The range of resources and leverage that banking giants have accumulated and enjoyed for centuries is unlikely to be matched by fintech anytime soon,” says Grzegorz Kosinski, “The key piece of that leverage is trust – something the younger generations, similar to Baby Boomers, are unwilling to surrender to challenger banks.”
Technology innovations
The clue’s in the name: fintech is driven by tech, and tech is driven by innovation and disruption. In the investment space, we’ve seen some really interesting technological developments over the last few years, and many of these are already shaking up the industry.
Robo-advisors. Robo-advisors, as we’ve mentioned before, use algorithms and automation to provide investment advice and portfolio management services. Now on the service, that sounds sketchy and borderline irresponsible, but it’s become a popular investment tool for a lot of people. The global robo-advisory market was valued at $7.9billion in 2022.
Artificial intelligence. Following hot on the heels of robo-advisors, we have machine learning and AI, which are being used to analyze vast amounts of financial data and make predictive investment decisions. This helps train and sharpen everyday robo-advisors, but it’s a gamechanger for VCs too: AI is already being used by the big fish to improve operational efficiency.
Fractional investing. Fractional investing platforms allow investors to purchase fractional shares of stocks, ETFs, or other assets, making investment more accessible to regular Joes. This kind of division has existed for a while, but usually only for specific scenarios (like stock splits, dividend reinvestment plans, or mergers and acquisitions). Now it’s open season.
Regulatory environment
Traditional investments have long operated under the beady eye of securities regulations and legislation, preventing harmful trades or market manipulation. The worry is that, with fintech bounding rapidly towards a bright, equitable tomorrow, the regulations may be slow to catch up. Fintech already faces a bunch of regulatory challenges, including compliance with securities regulations, investor protection, and data privacy and security. In some ways, it’s the Wild West out there, as regulators struggle to control fintech without crimping its huge potential. This is still a balancing act. Due diligence rules concerning Know Your Client (KYC) and Know Your Business (KYB), for example, have led to a rise in operational costs, squeezing profit margins and forcing companies to adapt.
Ultimately, fintech requires a global perspective because its reach affects all of us. These new technologies and platforms can touch companies and communities far beyond their physical location, sending money and capital soaring across international borders. They’re the money juice behind the cars we drive, the devices we carry, the apps we use. In the old days, investment was gated and private, now it’s a free for all. The challenge will be to keep it that way: free, for all.
