FinTech continues to dominate the headlines. It’s hard to open any business or financial publication at the moment without seeing an article on the impact of new, innovative companies ready to change our financial lives using technology.
The blockchain alone – the darling of FinTech era – could cut banks’ infrastructure costs for cross-border payments, securities trading and regulatory compliance by $15bn-$20bn a year from 2022 according to a study from Oliver Wyman.
The rationale behind many of these businesses – the headline grabbing ones anyway – is that a combination of digital disruption and increased regulatory complexity is opening up cracks in the business models of incumbent banks and providers that newcomers can exploit. These players are either looking to replace, or at the least disintermediate the incumbents or meet a new, emerging industry requirement.
This dramatic increase in the number of start-up businesses has meant that within the FinTech space, a new lexicon is emerging to help categorise different sub-sectors. PayTech, BankTech and InsurTech have all been terms applied to a subset of FinTech companies. But what about capital markets?
Untouched capital markets
It seems that the disruption (at least on a technological level) seen in other areas of finance has not yet reached the capital markets. For FinTechs looking to directly challenge incumbent financial institutions, capital markets is a tough nut to crack. It is a traditionally risk-averse place and new entrants find it hard to displace companies who have built up reputations and relationships with customers over decades.
What is the best route to success for FinTechs start-ups in this environment?
Regulation is more disruptive than FinTech
Capital markets technology companies (the original FinTech) tend to be specialists. The days of the single, multi-faceted IT provider are over. More intricate regulations, more specialised technology and increased global scale mean that it’s almost impossible for a single company to be an expert at everything. Instead of trying to be a jack of all trades, capital markets technology companies have narrowed their focus and increased their market share by specialising in niche sub segments.
This has served the industry well for years. If you needed a new derivatives pricing engine an order management system or a portfolio compression tool, you knew where to look.
The problem now is that markets have changed. In particular, the forthcoming MiFID II regulation has set the compliance cat among the technology pigeons.
On the one hand, capital markets participants must understand how MiFID II will impact their business models. But they’re also concerned about how exactly the technology systems underpinning their operations will need to change in order to be compliant.
MiFID II is a complex set of regulations and, understandably, institutions cannot yet quantify exactly how they will need to change their systems to ensure compliance or the investment required to do so. What is clear, however, is that the solution needs to be a holistic one across the whole business, rather than a set of point solutions which are then stitched together, patchwork-style. MiFID II has different implications in different markets but large financial institutions need to be able to centrally manage and monitor systems in an increasingly global marketplace. No single vendor can yet provide a complete solution: at the same time, institutions do not want the headache of going through multiple selection processes to find the group of vendors to do the job.
It’s here that the capital markets FinTech start-ups will find success.
Plugging the gaps
Established vendors have the relationships to advise their institutional clients around MiFID II compliance, but they don’t have the capabilities to offer a complete solution. Start-ups, on the other hand, offer innovative solutions which have been designed specifically to fill the gaps in the incumbents’ offerings. By partnering up, the incumbents and start-ups can offer institutions a complete MiFID II solution.
A partnership approach for MiFID II would reduce the headaches for capital markets participants and do away with the need for lengthy RFP processes and demanding in-house integration projects. By setting up a wider partnership framework, it’s possible to provide the best solution no matter what the situation. As well as being commercially profitable for the participating vendors, this solution has the potential to massively reduce the pain and expense of complying with MiFID II. It’s a model that’s been used by systems integrators for decades now, but has fallen out of favour due to the recent decline in the number of “business transformation” IT projects.
MiFID II has the potential to cause a resurgence of such large, all-encompassing implementations and while no one company has the complete answer, there are companies which can solve a part of the problem very well indeed. The recent rise of RegTech suggests that small, specialist regulatory technology firms can help plug the gaps in the technology portfolios of larger, more established players. Perhaps this partnership model will shine a light on the path to compliance.