In this edition of the newsletter, we have included exciting reports on the state of fintech in 2023 from F-Prime, the role of generative AI in banking, and an update on what Citi Group is doing for private markets.
Additionally, we have gathered industry buzz around the upward trend of private credit and included a profile of Singapore from the Financial Times. Lastly, we discuss how bank lenders in Europe are facing a growing risk in their mortgage portfolios due to the energy efficiency of homes.
We hope you enjoy the read!
Kilde’s Industry Intel: Our Favorite Industry Report Roundups
Fintech in 2023: A Tale of Regulatory Scrutiny and Risk-Off Sentiment
The State of Fintech report by F-Prime Capital highlights that 2023 was characterised by increased regulatory scrutiny and a more risk-averse atmosphere. Despite these challenges, the influence of financial technology innovations on the financial services sector remains significant.
Key Insights Include:
- Fintech has effectively disrupted traditional operations in software-based payments, buy now pay later (BNPL) strategies, and commission-free trading.
- Both longstanding financial institutions and new disruptors have adopted innovations in mobile banking and open finance, bringing about substantial changes within the industry.
- However, it's important to note that traditional incumbents have successfully outmanoeuvred newer entrants in areas like robo-advisory services, peer-to-peer lending, and direct-to-consumer insurance technology, demonstrating their resilience in the face of fintech disruptions.
- The long-term impact of cryptocurrencies, generative artificial intelligence, and real-time payment systems in the United States remains uncertain, and they are awaiting further development and acceptance.
Despite numerous successful startups transforming the financial landscape, established banks and brokerage firms continue to prosper. Notably, the top five banks have increased their market cap by $580 billion since 2003, and major brokerage houses have seen a $5.8 trillion rise in client assets over the last five years.
The prospects for fintech are promising, with the sector well-positioned for continued growth and innovation.
Link to report - https://fprimecapital.com/blog/the-2024-state-of-fintech-report
AI is taking the banking world by storm, and executives can't stop talking about it!
The most recent report from CB Insights has highlighted that Artificial Intelligence (AI) has risen to be the prime area of focus among the top 10 US banks, with a record number of mentions during earnings calls in the first quarter of 2024.
Key takeaways include:
- Banks are identifying generative AI as a pivotal tool for enhancing operations, ranging from intelligent document searches to customised financial advice.
- To leverage AI capabilities, some banks are forming partnerships with AI chatbot developers, whereas others are enhancing their in-house abilities or acquiring targeted technologies.
- Leading institutions such as JPMorgan Chase, Capital One, and RBC are creating competitive advantages (or "moats") around their AI operations through strategic hiring, securing patents, and investing in internal research and development.
- Nevertheless, significant challenges still need to be addressed, including data privacy concerns, the struggle to attract top talent, and budget limitations.
In contrast, interest and investment in blockchain have declined following the recent downturn in the cryptocurrency market. As a result, several major blockchain trade finance networks have ceased operations. However, key players like JPMorgan and Citi remain committed to experimentation and optimistic about blockchain technology's long-term adoption and revenue possibilities.
Link to report - https://www.cbinsights.com/research/report/top-tech-trends-2024/
Revolutionising Private Markets: Citi did something interesting.
Thanks to the rise of tokenisation, private markets are on the brink of a significant transformation. By leveraging blockchain technology and smart contracts, tokenisation has the potential to democratise access to the $10 trillion private asset class, unlocking new opportunities for investors and paving the way for a more inclusive and dynamic market.
Citi's recent proof-of-concept showcases the transformative power of tokenization. In partnership with industry leaders, Citi demonstrated how tokenization could:
- Enable shared on-chain Know Your Customer (KYC) processes for efficient investor onboarding.
- Facilitate on-chain collateral lending using fund tokens.
- Enforce security restrictions programmatically.
By providing a seamless bridge between traditional and digital assets, tokenisation has the potential to reshape how private market assets are issued, traded, and managed.
The digital transformation in capital markets has been slower than anticipated. However, public blockchains could accelerate this transformation by serving as shared computing infrastructure among financial institutions.
Link to report - https://www.citigroup.com/rcs/citigpa/storage/public/Fund-Tokenization-Summary-Report.pdf
Kilde’s latest scoop on Investing
Private Credit Opportunities are heating up!
Key Takeaways:
- The private credit market has reached a size of $1.6 trillion and is expected to expand further.
- Direct lending and credit opportunities funds have delivered strong returns, with over 11% in the last 12 months.
- Banks are retreating from corporate and real estate lending sectors, increasing demand for private lending solutions.
New opportunities are emerging in areas such as fund finance, significant risk transfer deals, and real estate loans.
Selecting the right manager is crucial, as some lender protections are diminishing, and economic challenges are on the horizon.
The private credit markets are rapidly growing in size and significance for institutional investors. With banks stepping back, managers have abundant opportunities to provide capital in sectors such as direct lending, real estate debt, fund finance, and risk transfer transactions.
Recent gains have been notable, with managers benefiting from higher base rates and less competition. Direct lending has seen returns of more than 11% in the 12 months leading up to September 2023, highlighting the growth and potential returns in the private credit markets.
However, as the number of growth opportunities increases, so do the risks. Lender protections for larger direct loans are weakening, and some borrowers will likely face a more challenging economic landscape ahead.
Investors would do well to consider the growing private credit sector, but careful manager selection will be crucial for successfully navigating future challenges.
Exciting article about Singapore from the Financial Times
This nation is characterised by high incomes, where most of its population resides in public housing.
It represents a utopia for the private sector, yet it is a place where public service roles can yield substantial wealth.
Despite a strong inclination towards autonomy from Western influence, English prevails as the principal language for instruction.
Singapore stands out, a testament to its unique geographical and historical context. Replicating its model is challenging; it requires a fresh, innovative approach to each problem encountered.
Reference: https://www.ft.com/content/6f59d545-8201-4fe6-b280-3e96cc245dc4?shareType=nongift
Bank lenders in Europe are facing a growing risk in their mortgage portfolios: the energy efficiency of homes.
In Germany, the European Union's largest economy, many homeowners need help to enhance their properties' energy efficiency. The Bundesbank has warned that this reluctance could significantly impact the value of homes and, by extension, the broader economy. Deutsche Bank also reports that only a tiny fraction of its residential borrowers currently need to meet the qualifications for green loans.
This situation presents several critical challenges for private credit lenders in Europe:
- They face the risk of lending against potentially stranded real estate assets, which could decline in value due to new energy regulations.
- There is a need to identify opportunities to provide liquidity to borrowers aiming for green home renovations and upgrades.
- Lenders must also focus on structuring tailored financing solutions, such as green loans and sustainability-linked facilities, to incentivise energy improvements.
As the push for sustainability gains momentum, private credit managers who can effectively navigate these risks and capitalize on 'green' lending opportunities in the residential sector may find themselves at an advantage. Developing expertise in underwriting against energy audits and plans for retrofitting will be essential.
The intersection of real estate, energy efficiency, and private credit in Europe is an area that warrants close observation in the coming years.
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About Kilde
Kilde is an investment platform tailored for individuals and institutions, providing access to private credit deals supported by cash-generating assets. We offer up to 13.5% annual returns to our investors, surpassing similar risk investments yielding around 8%. We are licensed by the Monetary Authority of Singapore. Find out more: https://www.kilde.sg/
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