Nordic mutual fund market participants have teamed up to determine whether blockchain could transform the industry
The best way to come up with an innovative technology solution for the capital markets is to gather a diverse set of stakeholders around the table to brainstorm and collaborate on a plan of action. While the technology itself is an important part of the dialog, it is necessary to have several more discussions about preparing the ecosystem for the transformation that needs to occur before migrating to the chosen solution. In the case of blockchain, the transformation is significant because it can fundamentally change the business model and current processes. The mutual fund industry in the Nordics is in the throes of just this type of exercise.
Sweden’s mutual funds market is big. Almost everyone in the country has savings in it, and the total assets under management is valued at about 3.5 trillion Swedish krona (about US$391.5 billion). Similar to other mutual fund markets around the world, the Swedish market is very old-fashioned and long overdue for a revamp. There are many mutual fund companies, and each one has its own asset registrar to keep track of share ownership. Solutions are often siloed, and processes are manual, paper-based and error prone. Orders can take days to go through multiple intermediaries on their way to the mutual fund company, and tracking the status is difficult. All mutual fund purchases in Sweden must be prepaid, so investors experience delays as money movements must be confirmed before confirming orders. Given these inefficiencies, the costs are high and so are the fees.
So back in 2017, Nasdaq and SEB started collaborating to figure out whether a blockchain solution might result in a substantial improvement. The first step was to run a proof of concept project, develop a prototype and then make a go or no-go decision based on the outcome. About a year into the project, the initial results looked promising, so the companies decided to hold a seminar to present the findings to other industry participants and invite them to collaborate on the project. They made it clear from the beginning that those who join must agree to commit one or two full-time employees who are experts in either payments, mutual funds or technology. Without ‘skin in the game’ there is no way to move the collaboration forward. Eight companies from different parts of the mutual fund industry including distributors, banks and service providers came onboard.
Five work streams were set in motion simultaneously, and for a period of three months, the streams focused on specific goals. These include (1) scoping the solution; (2) the functional requirements; (3) the performance, throughput, and technical issues; (4) any legal and regulatory hurdles; and (5) the commercial structure of the consortium.
By the first half of 2019, the group expects to decide whether to go ahead and invest in and build the solution, with a lanuch to the market. It will go forward if the participants agree on the solution conceptually, they can execute on the plan, and there are no rules and regulations to hinder it. Importantly, the business model must be viable and the structure of the consortium agreed upon, including how the costs will be shared by the participants, and how it will be governed.
On a similar project, Nasdaq is collaborating with EuroCCP, ABN AMRO and Euroclear to implement blockchain for improved collateral management, and that one has followed exactly the same process. Between the two projects, some valuable lessons have been learned.
Developing groundbreaking new business models based on pioneering technologies is expensive, so the market problem needs to be big enough to entice participants to invest resources in a solution. In fact, several blockchain proof of concept projects have failed because of a lack of interest from the business: in other words, there was no real money to be made or to be saved. In the Nordic mutual fund case, the market is huge, the transaction fees are roughly half a percent of assets under management, and the transaction costs could be trimmed significantly by moving onto a blockchain.
It is best to start collaborating with a small group of participants who have all committed resources to the project. The bigger group, the more complex the discussion is going to be, and the more difficult it is to find meeting times and get everyone on board.
The project needs a strong facilitator to keep the project moving forward on schedule. Ideally, the facilitator should have extensive expertise in technology and not compete with the other participants.
Finally, all participants must secure senior-level executive support to ensure that the working group meetings are productive.
The consortium firmly believes that blockchain can significantly improve the Nordic mutual fund industry. The technology could be used to replace paper-driven, manual processes that slowdown and add costs to the trading lifecycle. Since other markets around the globe have similar problems, this project is the first stepping stone toward harmonization.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.