New distribution trends in the Asian funds market increase the need for efficiency in the back office, says Leo Chen, head of Asia at Calastone.
Leo Chen knew a change had come in the market when he succeeded, after 20 years of trying, to explain to his Taiwanese uncle what he did for a living. “I work in fintech,” said Chen, who serves as head of Asia for UK-based Calastone, a global fund transaction network. “Ah,” said the older man. “Now I know.”
“I’ve worked in IT and operations for the majority of my career,” says Chen, recalling the conversation. “It was never really the cool thing to talk about. It’s welcoming to see a change.”
Financial technology is certainly in fashion at the moment. Even traditional financial organisations such as Ping An Insurance, China’s second-largest insurer, say they want to redefine themselves as fintech companies. Calastone, which has been a fintech firm from its launch in 2008, is pleased to see greater recognition of the benefits of technology. This recognition helps the company in its quest to increase automation rates and make fund order processing more seamless.
Calastone’s pitch is that it can help fund companies save money by making their back office more efficient. Instead of using fax machines, fund companies can plug into Calastone’s global network. Chen argues the value of the Calastone service is only going to rise as new trends transform the landscape for fund distribution in Asia (this is the subject of a research project carried out by Funds Global Asia, see pages 24-27).
For instance, the potential for digital fund distribution was demonstrated in spectacular style by Yu’e Bao, a money market fund launched by a unit of online retailer Alibaba. Earlier this year, Yu’e Bao became the world’s largest money market fund. Alone, it accounts for more than a quarter of the roughly 5 trillion renminbi ($750 billion) that is held in Chinese money market funds, according to the Asset Management Association of China.
Yu’e Bao was remarkable not only for the speed of its asset gathering, but for the way it confounded conventional wisdom about whom to raise assets from. Rather than taking inflows from a small pool of wealthy investors, Yu’e Bao made itself available to anyone, with a minimum subscription of just one yuan. In a sense, it is the definitive mass retail product.
Recent regulatory measures will force it to stay that way. Under pressure from the Chinese authorities, Tianhong Asset Management, which manages Yu’e Bao, has reduced the quota limit for a second time, meaning investors can each invest no more than 100,000 renminbi in the fund.
Chen says that to manage this kind of fund without automation would be unworkable. If, as some suspect, Yu’e Bao becomes a template for other Asian fund managers to follow, the demand for automation will only increase.
“The technology platforms need to be more efficient,” he says. “There’s no way they can manually process hundreds of thousands of orders for small amounts. They need to work smarter.”
Although some doubt the ability of other fund distributors to repeat the example of Yu’e Bao, that will not stop them trying. Chen has found that a number of distributors, such as banks, have heavily ramped up their digital strategies in the wake of Yu’e Bao. These companies want to have the ability to scale their distribution methods to give them the option to gather assets from a very large pool of investors.
This change comes alongside a trend, notable in the Asian market, for new distributors to challenge the dominance of the banks, which have historically controlled fund distribution in Asia. Insurance companies are making inroads into the sector. As these firms give up old methods, such as door-to-door premium collections, they begin to prioritise fund distribution to customers who either do not need insurance products or already have them.
That provides a new potential customer base for Calastone. Insurers that distribute funds need access to automation services as much as the big banks.
However, the path towards the final goal, full automation of fund orders in Asia, is long. Asia has the advantage of learning from the experience in Europe, which took roughly a decade to reach a situation in which automation was widespread and accepted. Although Asia is moving faster than that, Chen admits being surprised it is not going faster still. After all, this is a region where technology is widely used and understood – look at the dramatically high rates of smartphone penetration, for instance.
The problem, he says, is that back-office efficiency often does not get as much attention as asset gathering.
“Our challenge is to make our potential clients understand that digital technology is important not just on the distribution side but on the back end to become more efficient,” he says. “It’s all good trying to chase the next client and bring in the revenues but you have to be operationally efficient. If you make $10 a client and you’re spending $9 on operations, it doesn’t stack up.”
Calastone’s main strategy in Asia has been to concentrate on the countries that are hubs for cross-border funds business, namely Taiwan, Singapore and Hong Kong.
As well as offering fund order routing, the firm hopes to add to its growth in these mature markets by providing services such as daily or monthly reporting data. It is also hoping to help its clients automate the dividend process.
Chen says significant progress has been made. In Hong Kong, for instance, he anticipates more than half the trades in the market will soon be automated. The firm hopes to take on more clients, from large banks to small financial advisers, as the remaining half of the market embraces automation.
“One thing we hold true: We’re committed to providing products and services that fulfil our clients’ needs. And we’re interlinked so we can share success stories and, in a way, become a market intermediary. We are the bit that gels everyone together.”
©2017 funds global asia