It's not about CHESS - Part 3 | Front Book / Back Book
https://finclear.com.au/
In this special series 'It's not about CHESS', FinClear CEO David Ferrall gives his insights on Australia’s unique market microstructure that will enable rapid uptake of digitised securities, which is a direct result of ASX’s decision almost 30 years ago to promote direct ownership of listed securities via the Holder Identification Number (HIN).
The future of platforms – front book/back book.
When I think of the future of platforms, I look at our children and imagine how, with their ‘always on’ 24/7 mobile device connectivity and instant gratification/reward expectations, they will interact with future platforms for investments, financial advice and wealth management.
Already, with the rapid uptake of crypto assets and tokens via digital wallets, we get a view into that future. A world where assets are held directly in a digital wallet, and transaction times, account balances and holdings are measured in seconds or less.
Do we really think our current and future generations will be comfortable transacting and holding listed securities in a traditional custody wealth platform that is not able to facilitate the digital experience? The answer is a resounding no. This is why many of the fintechs building new advice models and forward thinking platforms are using API’s to connect to infrastructure and listed markets technology that enables and supports the digital experience.
When I look at the future of platforms, I think of it as a ‘front book/back book’ dynamic.
The ‘back book’ is the current ecosystem of traditional, independent custodial platforms. They have been very successful (and will continue to be in the short term) due to the enormous flows out of bank platforms. However, their cumbersome offering is not conducive to attracting the new generation of investors.
And for now, these traditional platforms probably don’t care - because the back book is so large, the short-term prize is so high, and the new generation of young investors have not yet accumulated enough wealth to make them interesting.
But the real prize is in the ‘front book.’ This is where new investment and wealth products will be delivered faster, more directly and much more efficiently to this rising generation of young investors, via improved real-time technology capabilities and tokenised securities.
Tokenised securities are simply securities – whether existing or new asset classes – that sit on a distributed ledger and allow the automation of functions such as transfers, corporate actions and notifications via an embedded smart contract capability. It is this capability that has the potential to collapse the many touch points and layers of fees that have built up within traditional financial services.
When we think about the future of platforms and the front book, we think of it as a digitally connected ecosystem where investors hold all their assets (both listed and unlisted) in their own name via a secure, authorised and permissioned digital wallet, with service providers interacting and communicating with that wallet to deliver specific advice, reporting and transaction capabilities.
Importantly, in this ecosystem, each provider only charges for the services they actually deliver – none of this charging a bps fee on the ‘value’ of a wallet.
We call this the ‘doing’ platform, versus the back book ethos of ‘let us hold all your assets in our custody’ solution, where you lose the benefits of direct ownership and pay an over- inflated bps fee on the value of all your assets.