The rise of private securities marketplaces is likely to mark the beginning of the end for the national stock exchange monopolies and herald a chance for challenger banks and fintechs to take advantage of lower funding costs from individual, accredited investors.
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.
Stock exchanges are facing disruption in the form of private securities marketplaces, a notion that appears a contradiction in terms but is in fact the logical extension of seed funding. A private securities marketplace is a digital platform that allows accredited investors, those with sufficient capital and knowledge, to buy and sell shares of private companies who either can’t or do not wish to be publicly listed.
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. And this capital-raising option typically gives fintech firms poor leverage in discussions and may even incentivise 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.
Solving problems for fintechs
Private securities marketplaces go a long way to solving these problems for fintechs, 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. And 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, enabling them to compete on a more even footing with incumbents listed on national stock exchanges.
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.
And 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 fintechs 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.