What’s at stake in the BNP-AXA FundLink deal?

A blockchain initiative in the arcane world of funds distribution could set the stage for a very different way mutual funds are perceived and used by investors.

111
http://www.digitalfinancemedia.com/blog/2017/09/20/fundlink/
Jean Devambez, BNP Paribas Securities Services
  • FundLink, a blockchain project to smooth customer onboarding being developed by BNP Paribas and AXA Investment Managers, has the potential to transform how mutual funds are traded
  • This sort of infrastructure tech development can set the stage for a very different idea about the use cases for traditional, actively managed funds

In June, BNP Paribas and AXA Investment Management announced a pilot project called FundLink to bring blockchain to funds distribution. The news garnered the usual press clippings, but no analysis of what it means. The co-development could – could – turn out to mean quite a lot for how the business of actively managed funds competes in an industry conquered by ETFs. DigFin found out how.

Jean Devambez, global head of product and client solutions at BNP Paribas Securities Services in Paris, is the leading the custodian’s initiatives into disruptive technologies and the new business models they make possible. Blockchain is one of these, and FundLink, the project with AXA, is one of its expressions.

His counterpart for FundLink is Joseph Pinto, global COO at AXA Investment Managers. Pinto says the firm’s innovation strategy involves three planks: finding ways to enhance investment performance; helping salespeople better manage their client relationships; and bringing new efficiencies to operations – which includes creating FundLink for distribution.

The idea
Devambez says funds distribution is crying out for disruption, not for its own sake, but because it’s a mess. “It remains globally fragmented, with many processes and many intermediaries,” he told DigFin. Europe’s Mifid-2 regulation, which kicks in next year, will only make it more complicated and expensive to administer – a global issue, given the popularity of Ucits funds in Asia and elsewhere.

“Blockchain will revolutionize the industry”

On a more fundamental level, BNP Paribas wanted to keep pace of clients whose own demands are changing. The onslaught of robo advisors may today be a marginal part of the funds business, but it demonstrates an erosion of trust in investment advisors and more reliance on peers.

Devambez likens this to the way TripAdvisor has undermined travel agents and other gatekeepers of tourism knowledge: “This is coming to asset management.”

Pinto says the power of technology to both undercut intermediaries as well as empower customers should be embraced. “Blockchain will revolutionize the industry,” he told DigFin. For now, it can be used to make customer onboarding and the KYC/AML process easier.

The project
Devambez says the bank decided on two aspects of the distribution process it could impact quickly: how asset managers onboard new customers, and managing customer data. FundLink tackles the first of these; BNP Paribas is moving ahead on the customer-data piece separately. Customer onboarding includes applications to buy a fund, a know-your-customer process, and then settling shares.

Blockchain creates a single ledger so that investors don’t need to constantly input the same personal data every time they conduct business with the asset manager.

It leaves a complete audit trail, ensuring customer information is up to date.

“Blockchain can quickly identify and validate a client’s profile”

BNP Paribas will serve as the ledger’s administrator: the blockchain will involve private permissions, which the bank alone can grant. Smart contracts will control who else can see a customer’s data. To ensure processing doesn’t get bogged down, the data will be stored off-chain, in a dedicated repository – including ones based in local jurisdictions where required by regulators.

“Blockchain can quickly identify and validate a client’s profile whenever they want to subscribe to a fund,” Pinto said. This makes it a better means of letting customers update their details, which in turn smoothes the KYC process.

Devambez adds that once the project goes live in 2018, it should reduce the onboarding process for most clients from days or even weeks to a few hours.

The implications
Faster KYC/AML is the first step in FundLink. The two firms envisage other steps (not all of them using blockchain) that will make other parts of fund sales easier. But adopting blockchain should have an impact beyond just faster customer onboarding.

“This can create momentum, a new dynamic”

Because the ledger will keep track of customers’ details, other processes, such as reconciliation of buys and sells, will also become faster. As a result, the structure of the day – how custodians, registrars, fund administrators and investment managers have crafted their timetables to handle subscriptions and redemptions – will be shaken up.

Cutting the NAV, now a once-a-day morning ritual, will become possible multiple times during the day. This may seem esoteric, but quicker customer information means faster buying and selling. “This can create momentum, a new dynamic,” Pinto said.

From an administrative or operational perspective, this means mutual funds need not be subject to today’s constraints. Those with the most investor activity will become liquid on an intraday basis.

“We don’t encourage day trading,” Pinto said. “We are long-term investors.”

But there is no mistaking the opportunity that active, traditional asset managers see in having products that could start to compete with exchange-traded funds and securities.

“It’s not a dramatic change,” Pinto says. “It’s about a leaner, quicker customer experience.”

But blockchain KYC also sets the stage for making mutual funds much easier to trade. Investors who prefer ETFs to gain cheap beta exposure may be lured back to active mutual funds, although fees on passive products continue to drop. Perhaps more realistically, active houses see intraday liquidity of funds as making them more attractive to robo advisors.