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The global reach of finance is undeniable. About 15 billion shares are traded every day, while 100 million credit card transactions are made daily. The incredible capacity of global monetary networks is only made possible by innovative and scalable technologies that connect parties around the world and create financial instruments never seen before.
As finance and technology continue to merge, the rise of new asset classes is set to change the industry forever. Not only are new alternative asset products being offered through technology, but the technology investment platforms that make them possible have already changed the way ESG and impact investing is done.
Innovation in the financial sector
The tremendous impacts of fintech can be felt across all financial sectors. A majority of executives in the field agreed that personal banking would be the industry most likely to be disrupted by technology. With three in four Americans now using their bank’s mobile app to meet their daily banking needs, the number of visits to physical banks has fallen 36% in the past five years. The way people pay for things has also changed forever. Looking at more convenient payment methods, more than two billion people worldwide now use electronic wallets as the trend towards contactless payments is now emerging as the preferred mode of transaction.
Leveraging technology, fintech lenders now have access to data acquisition and analysis techniques that process loans in as little as 24 hours. This speed and convenience has allowed fintech companies collectively to gain double-digit market share in the mortgage industry.
Investors have also started to feel the impact of fintech. Many people in wealth management find technology to be a necessary part of business strategy. However, with three in four people preferring self-service technology, the way people invest is changing. New investors are three times more likely to rely on mobile technology investing platforms, and millions of Americans downloaded mobile trading apps just in January 2021. Although online trading has been around since the 1980s , technology has only recently enabled investors to access different markets through improved trading infrastructure. This growth in invest-tech democratizes and educates investors through opportunities never imagined before.
At the heart of all of these changes are digital platforms. These all-in-one online solutions have reinvented the business model by connecting customers and businesses in a digital community. Largely driven by the digital demands of the pandemic, many more businesses are engaging with their customers online. As business activity continues to shift to these extended ecosystems, it is estimated that 75% of businesses will take advantage of digital platforms and use them to adapt to new markets by 2025. This technology is particularly critical for companies. investment alternatives that strive to improve transparency, communication with clients and the way clients engage with their investments.
The rise of alternative assets
The use of technology in investing has led to incredible growth, especially in the alternative asset sector. Splitting – the act of taking an asset, digitally breaking it up into smaller chunks, and creating a virtual market for those chunks – promotes accessibility across all investment asset classes. Fractionation removes the barrier of the initial capital requirement while simultaneously creating liquid digital markets for otherwise illiquid assets.
These fractional tech investment platforms can be found in almost any alternative asset class. Investors can buy stocks in sports memorabilia or rare baseball cards. Peer-to-peer lending platforms allow investors to secure debt investments with select individuals. Crowdfunding platforms for commercial real estate, multi-family real estate, and agricultural land enable direct fractional ownership of land and associated operations. Using digital investment platforms, investors can lend money to small businesses, purchase future music royalty rights, and even invest in future hours of people’s time. If you’ve ever wanted to invest in something, chances are there is a digital investment platform that makes it accessible.
Other technologies are also generating interest in alternatives. Blockchain and associated distributed ledger technologies increase investor confidence through financial transparency, while automated technologies dramatically reduce processing time and the need to rework investment underwriting requests.
Rethinking the 60/40 portfolio
A CoreData survey found that 40% of institutional investors plan to increase their holdings of alternative investments over the next five years. Meanwhile, 59% of retail investors want to expand their portfolio of stocks and bonds to alternatives. With industry forecasts projecting alternative assets as a $ 17 trillion industry by 2025, many believe the growth in investment in alternative assets is just beginning.
There are several reasons why very high net worth individuals allocate more than 50% of their portfolio holdings to alternative assets. Alternative assets are generally not correlated with more common asset classes and offer better portfolio diversification. With so many investment options available, there are greater opportunities to hedge against inflation. Portfolios that allocate even a small portion of their holdings to alternatives have historically generated higher portfolio returns and reduced portfolio-wide volatility.
The increase in the number of alternative investments and the accessibility of these opportunities has led many to believe that traditional portfolio allocations are outdated. Affordability may have made alternative investments popular, but a solid and ongoing financial performance can make alternative investments permanent in any portfolio.
Related: 3 Simple Steps To Start Investing: It Really Isn’t As Scary As You Think
Focus on sustainable investment
With so many new investment opportunities to choose from, investors are starting to prioritize the non-financial matters that are most important to them – and sustainability is at the top of their list. More and more people are ready to make sacrifices for ESG, as 66% of people polled worldwide say they would pay more for a good knowing that it was manufactured in a sustainable way. Meanwhile, two in three bank customers want their financial institution to become more sustainable – and half of all customers are willing to leave their bank if no progress towards sustainability occurs.
The supply and demand for sustainable investments is incredible. Retail investors and institutional companies are placing more emphasis on impact investing. As a result, the amount of money invested in ESG funds more than doubled from 2019 to 2020. Between December 2020 and June 2021, nearly 800 new ESG funds were created. Almost all REITS, regardless of market capitalization, are starting to place a heavy emphasis on ESG reporting, while other real assets that prioritize sustainability are also seeing increased opportunities and demand.
Fintech is also behind the rise of other new innovative investment offers focused on sustainability. Offers of impact tokens are on the increase for many social and environmental causes. One example is a new token carbon credit available to retail investors that takes advantage of blockchain capabilities to track environmental impacts. Another fintech trend is direct indexing, which consists of replicating a fund by directly buying the same weight of shares as the underlying index. By leveraging fractions of shares to prioritize and personalize their holdings, many investors are starting to create their own personalized ESG indices.
The real need for these products is the current state of climate change. Global temperatures are likely to rise by 1.5 degrees Celsius over the next two decades, potentially causing permanent and irreversible changes in weather conditions. The United Nations is slightly behind on its sustainable development goals by 2030, and the International Money Fund says more funding and investment in sustainability is needed. At a time when there is more carbon dioxide in the atmosphere than at any time as humans have roamed the Earth, the intervention of technology and finance is a silver lining where investors can easily use fintech and digital platforms to start impact investing.
Related: 7 Keys To Authentically Investing In Various Start-ups
The future of investing
A recent study found that 90% of Americans now use some form of technology to manage some of their personal finances. Old asset classes are modernizing as new investment vehicles take off. As the planet continues on its path to irreparable change, people are taking notice as more than half of investors are willing to sacrifice some of their portfolio performance to achieve an ESG goal.
It is now up to fintech to continue to offer investors accessible and innovative ways to get involved in impact investing.
Related: The Growth of Sustainable Investing