March 22, 2024

Small Investments, Big Impact: Fractional Bonds as a Tool for Financial Inclusion

Over the past few years, we have witnessed the rise of the mass retail investor. The influence of the average individual has steadily grown, with everyday investors accounting for 52% of global assets under management in 2021 and expected to rise to over 61% by 2030 as reported by Indefi. Similarly, retail investors have gone from claiming just over 10% of daily trading volume in 2011 to securing over 22% by 2021, according to Bloomberg Intelligence. As of early 2023, the individual investor market reached $7.2 trillion in size, as reported by IBISWorld.

One of the fundamental shifts fuelling the retail investment boom is the growth of digital trading platforms and the rollout of new products and services that help make investing more accessible to underserved markets. Despite this, for many individuals, the world of investing still seems like an exclusive club, with high barriers to entry and complex structures that leave them feeling excluded. 

This exclusion is particularly evident in traditional bond markets. While bonds offer the potential for stable returns and portfolio diversification, they often require significant upfront capital. This high minimum investment effectively shuts out a large portion of the population from accessing this valuable investment opportunity.

The Challenge of Traditional Bonds

The traditional bond market presents several challenges for many potential investors:

High minimum investment amounts: Many bonds require minimum investments of thousands or even tens of thousands of dollars, effectively shutting out individuals with limited financial resources.

Complexity and risk: Different bond types can be complex to understand, each carrying its own risks and fees, making them daunting for those lacking extensive financial knowledge or experience.

Lack of Transparency and Accessibility: Not all investment platforms prioritise providing readily understandable information about bonds. Individuals who lack access to financial advisors or wealth managers may find it even more challenging to navigate the complexities of the bond market and to find the instrument that best matches their risk appetite.

These barriers have historically limited participation of retail investors in the bond market, hindering individuals from accessing potential investment opportunities and building wealth.

Why bonds are intriguing for retail investors

Despite the challenges, the bond market is one of the largest securities markets globally and institutional investors have long reaped the benefits that this asset class has to offer. Some of these benefits make bonds particularly intriguing for individual investors as well:

Stability and Predictable Returns: Bonds, often referred to as fixed-income securities, provide investors with a stable and predictable income stream. Unlike the volatility seen in the equity markets, bonds offer a reliable source of returns through periodic interest payments. This stability is particularly appealing to risk-averse investors looking for a balance between income and capital appreciation in their portfolios.

Diversification Benefits: Diversification is a key strategy for managing risk, and bonds play a crucial role in achieving it. By including bonds in a portfolio alongside equities and other assets, investors can reduce their overall risk exposure. The inverse relationship between bonds and stocks makes them valuable as a counterbalance during market fluctuations.

Risk Mitigation: Bonds act as a safeguard against economic uncertainties. In times of market downturns, the relative stability and credit risk of bonds provides a buffer, preserving capital and mitigating losses. Their fixed-interest payments offer a degree of predictability, making them an essential component of a well-rounded investment strategy.

The Rise of Fractionalisation

Fractionalisation in the context of investing is not a new concept and has transformed outdated investment practices within some of the popular among retail investors asset classes like real estate and shares. It enables individuals to own a part of otherwise too high-value assets without having to cover the full cost, making investing more inclusive than ever. Advancements in technology are now paving the way for fractionalisation of bonds as well, facilitating the seamless division of bonds into fractions, and enabling investors to own a portion of a bond rather than the entire security.

While fractionalisation of bonds helps break all the barriers for retail investors we mentioned earlier, it also creates a great opportunity for retail-focused businesses to:

Enhance Liquidity: Businesses stand to gain from offering fractional bonds as it enhances liquidity in the market. Smaller units attract a broader range of investors, leading to increased trading activity and liquidity, ultimately benefiting the business offering the feature.

Expand Investor Base: Fractional bonds attract a diverse investor base, including those who may have been previously excluded due to high entry barriers. This expanded investor base allows businesses to tap into new markets, fostering growth and sustainability.

Gain a competitive edge: Offering clients access to fractionalised bonds can create a competitive edge in the race to meet the rising demand for innovative investment solutions.

Taking advantage of Fractional bonds

Ensuring that retail investors can participate in the market on par with larger institutional players is the first step in democratising bond investments. This inclusive approach not only opens new revenue streams for financial institutions and disruptive players but also empowers individual investors with unprecedented access.

As a leading investment technology provider, we at Velexa have taken a pioneering step in bringing fractional bonds to the retail investment ecosystem. By leveraging our platform, retail-oriented businesses like brokers, neobanks, exchanges, and retail banks can now give their customers access to over 300 high-quality corporate and government bonds across major markets, including the US and EU with minimal initial investment. Through our trusted brokerage partner network, we are continuously monitoring the most promising bonds for fractionalisation and are steadily adding new instruments to the mix. 

Businesses that already have their own channels and want to build a seamless user experience within them can easily integrate the Fractional Bonds capability as an additional feature using our Investing API

On the other hand, companies that want to launch a dedicated investing offering, combining fractional bonds and fractional shares available for key instruments in major markets (or choose different assets from a total of 700,000+ financial instruments, if need be), but don’t have the necessary infrastructure in place, can take advantage of our Investing as a Service solution. It includes two white-labelled mobile apps for different investor profiles, a web-based or desktop investing platform, and a client area for seamless user management. The most sophisticated of those channels, our desktop investing platform includes a Bond screener, where investors can use a number of filters to easily sort and find the bonds that best meet their requirements.

Beyond the Bottom Line

The adoption of fractional bonds goes beyond just a financial strategy. It represents a belief that the synthesis of innovation and accessibility can redefine the very core of retail finance. 

For us, as industry players, developing and incorporating such offerings shows our commitment to nurturing a dynamic and inclusive investment environment—one that transcends the domain of the privileged few.

For retail investors, fractional bonds become another vehicle for realising financial aspirations and moving closer to economic empowerment through smart investments.