The rise of private securities marketplaces is likely to mark the beginning of the end for the national stock exchange monopolies. It will herald a chance for challenger banks and fintech to take advantage of lower funding costs from individual, accredited investors, says GlobalData, a leading data and analytics company.
Katherine Long, Banking Analyst at GlobalData, comments: “When most people consider a stock exchange, what typically comes to mind is a large, national institution where shares of companies are publicly traded. This is about to change as stock exchanges are facing disruption in the form of private securities marketplaces, a seeming contradiction in terms but is in fact the logical extension of seed funding.
“This innovation has come about to solve the well-established problem of middle-sized companies; they are too small for the stock exchange, too big for seed capital, and too risky for a bank loan. This leaves a large proportion of companies, including many fintech firms, with the option of private equity and venture capital.”
This capital raising option typically gives fintech firms poor leverage in discussions and may even incentivize working on superficial rather than sustainable measures of growth, something challenger banks have a habit of doing. Additionally, there has been increasing consensus among CEOs and founders of new, fast growing companies for the need to retain control of company decisions when seeking to raise money.
Private securities marketplaces go a long way to solving these problems for fintech, enabling them to raise equity capital at this crucial growth stage from a broad stock of investors, as well as let employees trade their own equity holdings. There is good evidence that fintech firms are already taking advantage of this. One digital platform, Sharespost, offers accredited investors the chance to trade shares in 213 private fintech firms, including notable challenger banks Monzo, Chime, SoFi, Revolut, Nubank and Klarna. This development will also allow private fintechs to access lower overall funding costs, allowing them to compete on a more even footing with incumbents listed on national stock exchanges.
Long continues: “Even governments are taking notice, with potential reforms to the UK market including dual share classes, allowing founders and CEOs to retain a majority in shareholder votes, even after reducing their stake. From the investor standpoint, the emergence of marketplaces for shares of private, fast-growing firms previously unavailable, combined with new technologies such as distributed ledgers, will allow for the realisation of higher gains at a lower cost. This fact alone will give private securities marketplaces a good chance of disrupting the professional investment market.
“While national stock exchanges are still likely to exist, their monopoly on issuing and trading equity is soon likely to come to an end. For fintech and challenger banks, the rise of private securities marketplaces adds a vital tool to their funding belt, allowing them the chance to grow whatever their company size.”