When Mark Zuckerberg first introduced Facebook at his university, the market—when it caught wind of the creation—was very sceptical about who would need such a thing as a "social network." Ten years later, social networks are a phenomenon and the basis of many other businesses across nearly every sector, from hospitality to dating to transportation. And, of course, to finance: the emergence of many social trading platforms like eToro and ZuluTrade makes it possible for anyone to manage an online investment portfolio exactly like an experienced investor would, without any extra toil or trouble.
Internet technologies have had a sound track record in lowering barriers to entry: think about how easy and cheap it is to use social media to spread ideas, sell something, or launch a business. Finance, especially trading, is an industry perceived to be complex, non-transparent, and overrun with high management fees. But up-and-coming social trading firms are now disrupting the finance industry with easy-to-use platforms, high transparency, and nearly zero management fees, lowering barriers to entry and opening doors to new clients.
Disruptions, disruptions
With our eye on the current development of many tech firms, we see social trading disrupting two areas: 1) trading itself, by attracting users to social digital platforms, and 2) market intelligence, by generating predictions from data taken off of various social networks.
The idea of using social platforms for trading was introduced to the market shortly after the 2008 crisis, offering the possibility for everyone (nearly) to join and to trade in exactly the same way as the trader(s) you were following. The easy registration and low (nearly free) service fees have positioned these offerings as strong alternatives to traditional fund managers who are fighting against decreasing industry returns themselves.
But we believe that social trading goes beyond trading platforms: there is huge potential behind the data generated from social networks for market analysis. According to Domo, there are four million likes on Facebook and 350,000 tweets sent on Twitter from 3.2 billion internet users... per minute. By analysing this huge pool of data, some firms like SESAMm and Talkwalker claim to be able to give market predictions ahead of the market. Almax Analytics is even pushing this game further by analysing global news. And imagine: we've seen only the tip of the potential behind social-media-generated data.
Can social go beyond retail customers?
Part of the current FinTech boom, social trading carries the very nature of the democratisation of technology, offering access to better financial services and financial education to the masses. This is along the lines of what we've seen from robo advisors, blockchain, and mobile payments.
Fund managers are facing a lot of pressure from the market to attract the millennial generation and to lower operational costs. By using social trading platforms, established fund managers would have easy access to a new huge pool of customers with a smaller investment per account, leveraging their expertise in asset management at the same time. These new tech-savvy customers will be able to copy fund management firms' portfolios and emulate their strategies while paying lower management fees thanks to the new technologies. One thing we might see in a couple of years is that the fund managers better understand the needs of their clients on account of the data generated from the digital platform—exactly the way Amazon knows when you need a new phone.
Is social ready for finance? Or is finance ready for social?
One last point, pointed out by Shane Leonard in 2015, is that the Facebook click rate for financial-service-related ads is among the lowest (at 0.23%, compared to entertainment's 0.44% and publishing's 0.92%). We shall have to wait for the market before we can tell whether this is an indication that people are simply not that "social" about finance products, or if it's the case that FinTech disruptors haven't quite cracked it yet. As with other FinTech outputs, social trading can allow traditional players to define new relationships with clients who belong to the coming generation. It won't promise you a better return, but it will offer you a new way to engage your customers—and if social and digital are already in their genes, then your products and services should be too.
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