Buyers’ brief: Fintech drives capital markets

10 September 2019

In the wake of the financial crisis, regulators in the US and Europe have ramped up their oversight on capital markets institutions, driving up compliance costs. Firms are also seeing revenue stagnate as margins are squeezed ever tighter at a time when market volatility is low and outflows increase as investor interest in passive investments continues to rise, putting added strain on balance sheets.

Capital markets tech has boomed in recent years in response to incumbents’ myriad of challenges, offering up technological solutions, to everything from post-trade processing and regulatory reporting to enhanced data analytics and slicker UX and UI design. 

Migrating to the cloud

The backbone of many capital market players’ IT ecosystems still run on legacy technology that is on average more than 30 years old, leveraging applications written on programming languages like COBOL, ALGOL and Java. However, the cost of maintaining them is rapidly outweighing the price of replacing them. As such, many players in the sector have started transitioning multiple applications to the cloud, allowing them to benefit from the enhanced performance, improved security, cost and scale offered.

However, despite the many benefits of cloud-based solutions, the technology’s adoption has been relatively slow, with the industry still many years away from a complete transition. In 2017, the capital markets industry spent around $1.2bn on cloud computing, according to global professional services firm Accenture. Though that figure is expected increase by nearly 20 percent over the next few years as the pace of adoption speeds up.

Capital markets cloud migration is being facilitated primarily by big tech firms such as Microsoft, Google, and Amazon, as well as smaller fintechs like US-based OpenFin, which offers out-of-the-box solutions to help the industry accelerate its digital transformation away from legacy systems.

“Agility and interoperability are core pillars of our digital strategy because time is a precious resource, especially in a banking environment,” according to Brett Tejpaul, head of digital and client strategy at Barclays Investment Bank. ‘OpenFin accelerates our innovation cycle and allows us to create better workflows, enabling our colleagues and clients to make more productive use of their time.’

Capital markets institutions are not just using fintech solutions like OpenFin, they are financially backing and working closely with tech start-ups too. According to data from crunchbase, OpenFin’s latest equity funding round (Series C) in May was led by Wells Fargo, alongside Barclays and JP Morgan. The latest round brings OpenFin’s total amount of venture funding to $40m.

According to CB Insights, between 2013 and 2017 global equity funding in the capital markets tech space hit $8.69bn over 823 deals.

Innovation through collaboration

When fintechs first hit the scene, there was a nervousness with the incumbents in the financial services industry that these new tech savvy start-ups would rise to disrupt the entire industry, leaving larger companies that failed to act quickly on the scrap heap.

Instead, traditional capital markets institutions and start-ups have become deeply interconnected, with industry veterans investing and even sitting on the boards of fintechs with the aim of helping them build entirely new infrastructure and new technological ecosystems.

Partnerships were formed rather than rivalries, as large incumbents jumped at the chance to work with agile, fresh-thinking, technically advanced organisations capable of addressing critical pain points created by antiquated legacy systems. 

Earlier this summer, Symphony, a provider of secure messaging and other collaborative tools for the financial services sector, raised $165m from strategic investors from the capital markets space like Standard Chartered, with its latest funding round valuing the business at $1.4bn.

“Symphony has generated tremendous interest for revolutionising buy-side and sell-side secure messaging and collaboration in global markets, both in content curation and consumption as well as the workflow across the whole deal life-cycle,” says Yann Gerardin, deputy chief operating officer and head of corporate and institutional banking at BNP Paribas.

Symphony has now raised around $460m in financing, with previous strategic backers including Natixis, Société Générale, Duetsche Bank, Bank of America, Credit Suisse, Goldman Sachs, Normura, BlackRock and HSBC.

Incumbents in the capital markets space have long preferred to build their own IT solutions in-house in a world where propriety trading software that boasted capabilities rivals lacked provided an advantage over the competition. But in today’s world, where financial institutions battle it out to reduce spending and cut costs, and where young developers dream of working in big tech rather than at big banks, there is little appetite from capital markets players to spend billions on in-house offerings.

Instead of building in-house, long-standing capital markets institutions, after getting in on the ground floor with fintech’s through early-stage investment, have opted to beef up their technology offering through acquisitions.

UK-based NEX Group, now a subsidiary of the Chicago Mercantile Exchange (CME), has made significant investments in the fintech space through its innovation arm Euclid Opportunities. The inter-dealer broker bundled core services through strategic acquisitions, including post-trade processing platform Traiana and regulatory reporting platform Abide Financial, along with several other deals.

The future of capital markets institutions

According to Accenture, by 2022 the capital markets industry - while still required to perform many of the same functions it does today - the role and the manner in which it performs these functions will be different. Just how different will depend on how the regulatory and economic landscape unfolds over the next three years, with the winners and losers decided based on their ability to innovate to suit market expectations.

“Between now and 2022, the industry will be shaped by automation, self-service expectations, and the continued rise in non-bank liquidity and execution providers,” the report states. “In this context, technology offers a way for firms to get ahead.”

“Yet global market players that choose to be ‘fast followers,’ particularly those in intermediary functions, risk seeing their rivals accelerate beyond reach.”h

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