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Fintech innovation: Where next for capital markets?

The digital disruption affecting banking and other financial services is likely to accelerate with the growing success of London’s Fintech industry. I use the term ‘Fintech’ here not just to mean a company that competes with banks but from a wider perspective; an economic industry composed of companies that use technology to make financial systems more efficient.

Fintech start-ups and entrepreneurs are raising more money from investors and venture-capital firms than ever before, with retail banking being the biggest beneficiary of this investment drive. We have seen retail banking transformed with Fintech developments in mobile payments, peer-to-peer lending and money management, but could the same thing happen in capital markets?

Tough regulatory and compliance requirements have previously deterred investors and start-ups from focussing on capital markets, but this is beginning to change. Banks are now rethinking their business models due to regulatory pressures and this has also affected their technology infrastructures. Faced with tighter budgets, firms are becoming even more reluctant to build all their technology in-house and there is now a greater willingness to turn to start-ups for new and innovative technology to improve efficiency and reduce costs. Investors and start-ups are becoming aware of this and are beginning to turn their attention to focus on capital markets.

Fintech innovation is having a big impact on existing areas such as analytics, data management and business intelligence, but also in helping develop new ways of doing business, all of which are vital for better risk management practices. Another area of growing interest to investment banks is the evolution of cloud technology. Concerns about security have previously made banks cautious of adopting such technology, but this is beginning to change, following improvements made to cloud security and the availability of more applications. Banks are also applying cloud concepts that benefit enterprise IT as a whole, a process I like to call ‘cloudification’. Two of the biggest challenges that this new world brings to big financial corporations are agility and cloud computing.

The attraction of cloud technology is that it allows firms to offload infrastructure requirements to cloud service providers. Start-ups and SME’s have quickly taken advantage of this opportunity as it helps them to reduce headcount, IT infrastructure investment, software development and application support costs. Banks can also realise the benefits of moving data, software and services into an online ‘cloud’ environment, but only if the security is of the highest order. Cloud technology has now evolved and concerns about security are disappearing; encouraging banks to embrace the opportunities on offer. With regard to agility, the Fintech world is aligned to the current digitalisation trends, including: continuous innovation, frequent deliveries (of three to six weeks), the introduction of the minimum viable product (MVP) concept, and lean processes. This is also a challenge for banks, as they have heavy processes that make the decision making a hassle, innovation tough and delivery of new ideas very slow.  

If Fintech is going to increase its influence in capital markets, greater education and collaboration amongst investors, start-ups and banks is needed. Start-ups and investors have previously been unfamiliar with the sector and need to understand how Fintech can best serve the needs of capital markets. Banks need to have confidence that start-ups and smaller firms understand their industry and will remain in business in the long term, while vendors have to understand the needs and challenges faced by all participants.

We’re also seeing more bankers and traders changing careers and moving into the financial technology sector. These individuals are at the forefront of Fintech innovation as they are using their front-line experience and expertise with financial products, markets, regulations and systems in order to develop new products and services. Greater collaboration is also emerging with the growth of more Fintech Innovation Labs which aim to bring entrepreneurs and banks together.

Investment banks are also beginning to invest directly in Fintech companies, by creating their own in-house venture capital funds. The potential benefit of this is the chance to learn from leading Fintech innovators, as well as to partly own the emerging technology. However I doubt on this model since generally sucks the Fintechs into the bank’s operating model and processes losing the agility and innovation factors.

To grow the collaboration between banks, start-ups and investors they should consider setting up a neutral ground governed by a very lean common framework. Consultancy firms specialising in technology and capital markets could play a facilitator role as they are also performing an influential role in developing this collaboration by bringing these communities together. The knowledge and expertise consultancies have will prove invaluable to banks seeking to leverage the benefits of Fintech innovation and start-ups seeking to develop potential applications and products for investment banks.



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