How open banking is making alternative investments more accessible for brokers and investors
Alternative investments are financial vehicles that aren’t typically listed in most traditional portfolios - anything from wine and whisky to antiques, gold, art and non-fungible tokens (NFTs).
Often these are a tool for specialist institutional investors wishing to diversify their investment portfolios, with many allocating as much as 10 to 20% of their portfolios to these assets. But their ability to typically withstand economic volatility and accumulate in value at competitive rates, plus changing regulations, advancements in technology, and more accessible investment and tracking tools, mean alternative assets are also becoming increasingly interesting to more ordinary, individual investors.
Investment in alternative assets is, however, not without its challenges - buying a painting or a cask of whisky is not the same as buying a share in a floated company that’s trading on an exchange. In this post we’ll look at these challenges, and how innovations such as open banking can open up the world of alternative assets for both brokers and investors alike.
The alternative investment industry may be enjoying the limelight, but it’s far from perfect. The challenges it faces include:
Tight profit margins
Alternative investments, especially physical assets such as whisky, wine, collectables, and art, often carry a high initial cost of investment and require substantial time, often decades, to achieve appreciation and profitability. The result for the businesses who broker and manage the assets is a tight profit margin, with financial gain subject to a slow burn effect.
For instance, investing in whisky involves significant cost for investment houses, such as buying casks and years of storage and maintenance fees. The investment house may well (hopefully) receive a respectable cut for its services once the investor sells its asset, but its margin on that initial investment is likely to be very small. So anything it can do to reduce costs at the point of investment makes a real difference.
Lacking digital infrastructures
Many goods that are commonly associated with alternative investments stem from traditional industries. Such is the case for art and whisky, often running on relationship-based acquisitions with face-to-face interactions. This not only makes these markets harder to penetrate, but it can complicate the shift to digital channels - vital in a post-Covid world, but one where it can be hard to replicate the offline experience. Digital-savvy investors may struggle with analogue, non-realtime investment options, and old-school brokers might fail to see the business case in digital investments.
Susceptibility to fraud
Generally, alternative investments require high-value initial deposits from investors. Such capital-intensive transactions are attractive to fraudsters and money launderers. The need for businesses to have transparency and oversight of their investors is imperative for keeping their customer’s money safe and instil trust, while also protecting the business from illicit funds.
How can open banking help this industry?
Innovation is at the core of open banking, but we are still just at the beginning of its integration in the alternative investment space. What can it bring?
Modernisation and accessibility
Open banking allows investors to transfer their investment funds safely, securely and in seconds.
If you’re asking investors to buy into premium assets, it’s only right that they should have a premium online investment experience. Adding alternative payment methods like open banking to a checkout, rather than rely on outdated methods like BACS, CHAPS or card payments that incur high fees, is making it easier than ever to invest. Clients are connected straight into their preferred online bank account, which means all data comes pre-filled, so there’s no risk of frustratingly typing in the wrong digits. What’s more, Citizen’s instant cardless payments are centred around user experience, making them a delight to use for clients of any demographic.
When payments are made in the tens of thousands of pounds, it’s important that businesses have a payment process that’s transparent and secure. Poor oversight and security can result in investors unwittingly becoming victims of fraud. The bank-based biometric account verification used by open banking facilitates the validation and monitoring of transactions, ultimately preventing fraud and ensuring peace of mind that funds belong to the person they claim to be from.
Better profit margins
The initial investment cost for customers in this industry tends to be high. Therefore the cost for an investment house to process a payment of such high value using a credit or debit card is prohibitively high due to transaction fees — typically around 3%, and sometimes more. This risks eating into a business's bottom line given the tight margins.
Open banking involves fewer intermediaries than cards, as funds are transferred from one bank account directly to another, lowering the processing fees on every transaction and potentially saving a business thousands of pounds.
Processing investment payments using Citizen
Citizen’s instant cardless payments are backed by open banking technology. Investors receive an incredible user experience, while providing investment houses with an easy-to-navigate dashboard for transaction monitoring, heightened security, instant settlement on all transactions (improving cash flow management) and reduction in payment processing costs. What’s not to like?
How VCL Vintners is using Citizen to make whisky investments more accessible
VCL Vintners is an excellent example of how Citizen is using open banking to transform the whisky investment experience.
The whisky cask broker sources and manages Scottish malt whisky casks for investors. Fed-up with the risk of keying errors and the slow settlement times inherent in BACS payments, but keen to protect tight margins from high card processing fees, VCL turned to Citizen for a solution.
Read this short case study to find out how Citizen has helped VCL to modernise the online whisky investment experience for its customers, making it accessible to more people while improving their profitability at the same time.
Want to learn more about adding Citizen as a payments provider to your checkout? For a full demo or to talk to our team to find out more, contact us here.