FinTech Platforms and Mutual Fund Distribution
Claire Yurong Hong – SAIF, Shanghai Jiao Tong University;
Xiaomeng Lu – SAIF, Shanghai Jiao Tong University;
Jun Pan – SAIF, Shanghai Jiao Tong University
-- The rise of the platform economy over the past decade is transforming the way we live. The widely adopted platforms—such as Google for information, Amazon for retail, and Uber for taxi rides—have profoundly re-shaped how these respective industries aggregate and disseminate information. Despite the rapid technological development, the numerous distribution channels—organized by fund families, banks, and brokers—still segment the intermediation of financial products, such as mutual funds.
The emergence of FinTech platforms in recent years threatens to break this institutional segmentation and reshape the intermediation of financial products in China. On the consumer side, instead of acting as a facilitator for traditional financial institutions, FinTech platforms, created by tech-driven firms, distribute mutual funds directly to individual investors via mobile apps. Regardless of time and place, investors can instantaneously access almost the entire universe of mutual funds at their fingertips. On the production side, platforms level the playing field for all funds, as fund managers, no matter how small or invisible, have the potential to reach the entire user base. We show in our recent paper, “FinTech Platforms and Mutual Fund Distribution,” that the emergence of FinTech platform results in substantial change in the landscape of the asset management industry.
Living in the era of digital payments via Alipay and Wechat pay, Chinese customers are early adopters of FinTech platforms. In February 2012, China Securities Regulatory Commission (CSRC) first announced that tech firms independent of fund families, banks, and brokers may distribute mutual funds. Since then, FinTech platforms have grown into a formidable presence. By 2014, top platforms like Tiantian and Ant Financial have covered almost the entire universe of mutual funds in China. By end of 2018, about one-third of the sales of funds through distribution channels took place on FinTech platforms.
So how would investors behave after the introduction of FinTech platforms? We find a striking increase in the sensitivity of investor flow to fund performance, driven by investors chasing much more aggressively after the top-ranked funds on the platforms. The average quarterly net flow to the top-ranked funds increases from an average of 1.88% pre-platform to an astonishing level of 19.65% post-platform. We further provide supporting evidence that the simple information display on these FinTech platform apps, which focuses mostly on fund past performance, generates a pattern of coordinated or attention-induced performance chasing, which result in a much stronger flow-performance sensitivity in the aggregate.
The impact of FinTech platforms goes beyond investors to fund managers and fund families. In the presence of amplified performance-chasing, funds that are ranked close to the front page exhibit a pattern of increased volatility to “gamble" the market and enhance their chance of making onto the top list. This added risk taking is mainly present in the systematic component, which indicates that the fund managers have already reached the limit of their own skills and are using leverage to get ahead. For fund families, we find that large fund families lose their cohesiveness as organizations, as fund managers are increasingly evaluated in the context of the entire universe of funds. Their relative standing within a family becomes less important.
The success of the platform economy has transformed the way we live. Relative to other products and services, such as retail goods or taxi rides, ﬁnancial products are of unique importance because of their impact on the allocation of ﬁnancial capital in the economy, their acute sensitivity to information, and their inherent liquidity. Financial products also have various forms, with the risk and return tradeoﬀ functioning as a common thread. From money market funds to P2P loans, the return and risk characteristics of ﬁnancial products expand over a wide spectrum, and the role of platforms can also vary substantially. These considerations, along with the rapid expansion of technology into ﬁnancial intermediation in recent years, make it all the more important for practitioners and policy makers to understand the economic impact of bringing ﬁnancial products to the large-scale, tech-driven platforms.
Our ﬁndings suggest that platform companies should move beyond technology and incorporate insights from the fields of finance and economics into the designs for their systems. Relative to the traditional distribution channels, platform companies—equipped with superior customer data and advanced analytical technology—do have comparative advantages in oﬀering ﬁnancial services to their customers in the new era. Designing policies to promote eﬃcient use of the technological advantages and avoid unintended consequences presents a challenge as well as an opportunity for platform companies and policy makers.