Over the past few years, financial technology (FinTech) has disrupted the monetary services industry, transforming how individuals engage with markets and treat their wealth. Innovations, including mobile trading, robo-advisors, and social media platforms, have democratized investing, making it available to a broader target audience. However, these improvements have delivered demanding situations, amplifying behavioral biases and increasing the dangers of impulsive decisions (He et al., 2024).
This blog delves into how FinTech improvements and evolving investor behaviors reshape economic solutions. We explore their effect on retail investing, the demanding situations posed by these modifications, and the steps financial institutions plan to take to deal with those shifts efficiently.
The Evolution of Retail Investing Through FinTech
Over the past few decades, technology has revolutionized retail investing. The journey started with online buying and selling systems in the 1990s, empowering individual traders to control their portfolios without intermediaries. Fast-forward to the present day, FinTech innovations have taken accessibility to an exponential level. Mobile trading apps, algorithm-driven robo-advisors, and vibrant and passionate investor networks on social media platforms have made investing a mainstream activity.
During the COVID-19 pandemic, millions of new traders entered the marketplace, pushed via disposable profits and further time to discover monetary opportunities ( ETF Stream, 2021). The increase of new competitors demonstrates how FinTech has changed market dynamics and access, democratizing wealth-building resources that were previously only available to institutional players ( Finance Magnates, 2023).
The Rise of Retail Investors and Increased Market Participation
A) Growth in Retail Trading
Retail investors are actually a sizable force in global markets. In the U.S., retail trading volumes had grown from less than 10% in 2010 to over 18% due to the vast accessibility of FinTech platforms. For 2020 alone, over 5 million new retail debts were opened, driven via mobile phones, simplifying the funding method (Briére, 2023).
B) Global Reach and Enthusiasm
This surge in retail investing isn’t constrained to the U.S. Countries across Europe, Asia, and Africa are witnessing comparable tendencies, as mobile platforms permit buyers to explore numerous asset classes, along with equities, cryptocurrencies, and commodities (Feyen et al., 2021).
The emergence of this new class of retail investors has altered marketplace dynamics. Financial institutions should embrace this shift, ensuring their services are inclusive and adaptive to satisfy the wishes of various increasingly tech-savvy audiences (Briére, 2023)..
1. Mobile Trading Apps: Convenience Meets Risk
The Double-Edged Sword of Accessibility
Mobile trading apps have transformed investing into a pastime activity as simple as online shopping. Features like commission-free trading, real-time market updates, and gamified interfaces have attracted thousands of users. However, this comfort comes with dangers. Studies show that mobile customers are more likely to engage in frequent, high-risk trades than those using conventional structures (He et al., 2024).
A study discovered that mobile app users are 67% more likely to invest in volatile assets, regularly chasing short-term profits (Kalda et al., 2021).. This behavior, known as “return-chasing,” is amplified by the dopamine-driven nature of app notifications, which force impulsive selection-making ( Weisenthal, 2014).
Investors who use mobile apps more frequently increase trade volume by up to 80% and make more erratic decisions, which leads to self-control problems and overconfidence. Younger investors, particularly men, exhibit more impulsive behaviors on mobile platforms due to their higher levels of engagement and heightened sensitivity to short-term market swings (Briére, 2023).
As mobile apps lower barriers to investing for the masses, they also inflate heuristics and biases that prompt users to make wrong decisions that negatively affect their investments. To manage these biases, firms must educate investors and design their apps to avoid making bad decisions.
2. Social Media and Social Trading: Factors Affecting Investment Decisions and Prejudices
Traditionally, investing has been a social affair whereby investors cluster by giving information and advice. Nowadays, similar to StockTwits and eToro, investors can talk, plan, and even copy transactions on the same day. This social aspect can lead to an adverse external influence that creates what is known as a bandwagon effect in which investors make decisions based on the number of people using them, not on fundamentals (Sagar et al.,2023).
Social networking also creates ‘filter bubbles,” in which investors receive only information that they want to hear. A study on StockTwits discovered that its users are likely to follow other users with similar opinions to gain more information that confirms their own impressions. This evidence signals an ‘echo chamber’ effect, which increases the likelihood of making wrong decisions, especially for investors operating on social trading platforms (Engelberg et al., 2022).
Social media enhances the investment experience, but it also strengthens biases. Financial institutions can reduce these risks by providing tools that offer balanced viewpoints, including curated market insights and individualized advising services.
3. Robo-Advisors: A Gateway to Diversification and Inclusion
Smarter Investment Decisions
Improving Investment Decisions and Diversification
Robo-advisors are reworking how portfolios are controlled. By leveraging algorithms and records, they assist investors in building well-diversified portfolios, decreasing risks and improving returns. Robo-advisors additionally automate rebalancing and tax optimization, ensuring portfolios align with traders’ dreams (Berkolde, 2024).
Promoting Financial Inclusion
With lower costs and minimal capital requirements, robo-advisors make professional investment recommendations reachable to a much wider target audience. A U.S. examination highlighted that middle-class participation in equity markets improved by 59% following the adoption of robo-advisors, particularly among companies previously excluded from traditional advisory services (Brière, 2021).
Robo-advisors are instrumental in fostering financial inclusion and better investing. However, ongoing innovation is vital to satisfy the evolving desires of a numerous investor base.
The Role of Financial Institutions: Adapting to Changing Investor Behaviours
1) Prioritising Financial Education
As thousands of new traders enter the marketplace, financial training has emerged as a critical need. Innovative tools like gamified learning of structures and virtual reality modules could make economic education more engaging and effective.
2) Hybrid Models for Digital Advice
While robo-advisors offer value-effective solutions, many buyers nevertheless require human interaction. On the other hand, digital advice is in growing demand among retail investors. A survey by the World Economic Forum found that 80% of investors value digital advice, yet only half currently receive it (World Economic Forum, 2024). Hybrid models combining algorithmic steerage with human advisors can bridge this gap, resulting in personalized advice and emotional reassurance throughout market downturns.
3) Customisable Investment Solutions
Retail traders frequently need more diversification, focusing heavily on individual shares or cryptocurrencies. Financial institutions can cope by imparting customizable portfolios aligning with personal goals and risk tolerance. Direct indexing, for instance, permits investors to tailor their portfolios even while preserving diversification (Briére, 2023).
Embracing Change for a Sustainable Future
FinTech is revolutionizing retail investing, developing greater participation and financial empowerment possibilities. However, those improvements additionally carry demanding situations, from amplified cognitive biases to multiplied risk-taking behaviors.
Financial institutions must respond to these adjustments by imparting instructional resources, hybrid advisory models, and customizable funding merchandise. By doing so, they could foster accountable investment practices, empower retail buyers, and promote long-term monetary stability.
As the financial service landscape continues to evolve, institutions that adapt proactively to the desires of modern investors will lead the way in constructing a more inclusive and sustainable funding atmosphere.
Sources:
He, He and Jones, Laurence and Lu, Yun and Gepp, Adrian, Technology-Enabled Innovation in Financial Markets and Retail Investors a Systematic Literature Review. Available at SSRN: https://ssrn.com/abstract=4953621 or http://dx.doi.org/10.2139/ssrn.4953621
How coronavirus changed financial markets forever. (2021, June 28). ETF Stream. https://www.etfstream.com/articles/how-coronavirus-changed-financial-markets-forever
The Democratization of Investing: How Fintech is Empowering the Masses. (2023, July 5). Financial and Business News | Finance Magnates. https://www.financemagnates.com/fintech/investing/the-democratization-of-investing-how-fintech-is-empowering-the-masses/
Brière, M. (2023). Retail Investors’ Behavior in the Digital Age: How Digitalization is Impacting Investment Decisions. Social Science Research Network. https://doi.org/10.2139/ssrn.4506007
Feyen, E., Frost, J., Gambacorta, L., Natarajan, H., & Saal, M. (2021). Fintech and the digital transformation of financial services: implications for market structure and public policy. Bank for International Settlements. https://www.bis.org/publ/bppdf/bispap117.pdf
Kalda, A., Loos, B., Previtero, A., & Hackethal, A. (2021). Smart(Phone) Investing? A within Investor-Time Analysis of New Technologies and Trading Behavior. SSRN Electronic Journal. https://doi.org/10.2139/ssrn.3765652
Weisenthal, J. (2014, July 6). Return-Chasing Behavior. Business Insider. https://www.businessinsider.com/return-chasing-behavior-2014-7
Sagar, Balu & Gaikwad, & Deshpande, Madhura & Gautam, Indu. (2023). Role of Social Media Information in Influencing Investment Preferences of Retail Investors: An Empirical Study. Journal of Informatics Education and Research. 3. 2293. 10.52783/jier.v3i2.381.
Engelberg, J., Mullins, W., Banerjee, S., Acunto, F., Doran, J., Fedyk, A., Fresard, L., Garfinkel, J., Heimer, R., & Hirshleifer, D. (2022). CU-Boulder. https://willmullins.net/papers/Echo_public_Feb2022.pdf
Berkolde, L. (2024, October 15). Robo-advisors: A comprehensive guide to automated investing. Mintos Blog. https://www.mintos.com/blog/what-is-a-robo-advisor/
Brière, M. (2021). The Impact of Robo Advising on Individuals’ Savings and Investment Decisions. https://www.efama.org/sites/default/files/files/Roboadvisors%20overview%20Efama%202021%2012%2015.pdfIn collaboration with Accenture The Future of Financial Advice. (2024). https://www3.weforum.org/docs/WEF_The_Future_of_Financial_Advice_2024.pdf
