According to ‘The Pulse of FinTech 2018’ report by KPMG, fintech startups bagged over $111 billion in investments across 2,196 deals. The technological evolution of fintech startups has outmatched that of traditional financial services by many leagues. Not only has this served to disrupt the space by directly pitting startups against tech giants, but has also transformed the tools of global trade and commerce. One startup even estimated the total cost of the recent US government shutdown right down to its last cent.
Various emerging technologies have given rise to new business-technology startups that didn’t even exist ten years ago. It’s no surprise then that investments in sectors of regulatory technology (RegTech) have tripled from USD 1.2 billion in 2017 to USD 3.7 billion in 2018.
Meanwhile, the versatile nature of blockchain technology is being used to craft specific solutions for capital markets, everything from cryptocurrencies to capital issuance. Even the simplest technology tools in the hands of FinTech are being used to enhance point-of-sale customer experience while also controlling fraudulent transactions.
However, the most recent breakthrough amongst all these has been the rise of FinTech startups in capital markets. Since 2010, capital market infrastructure (CMI) linked FinTechs has grown nearly 300% since 2010, offering solutions to tackle complex front, middle, and back-office problems.
For startups, success amidst cut-throat competition isn’t easy to achieve. ‘Nine out of ten startups fail’ is an oft-repeated maxim. Compliance and legal issues, along with inadequate funding have been the primary roadblocks in this quest. But despite these difficulties, fintech startups are ideally placed to resolve longstanding issues in the capital markets industry. These issues include high structural expenses, stagnant revenues, and enormous capital costs.
These challenges combined with the changes demanded by regulators have led to a decline in the returns on equity (ROE) for investment banks year after year. CMI providers (CMIPs) are compelled to deliver regulatory changes, such as the shift toward compulsory central counterparty clearing of over-the-counter derivatives, or external changes in customer behavior within the investor scenario. These pressures and complexity typically combine to cause organizational fatigue. This leaves high-level management with hardly any scope to invest in initiatives that can increase ROE.
Costs associated with the development and implementation of regulatory compliance systems are unavoidable, but costs incurred by investment banks to maintain disparate systems are unnecessary. Despite wanting to harness cutting edge technologies, they get caught up in the devil’s snare of legacy infrastructure. Instead, they need to leverage an external fintech solution to achieve their goals more optimally. Since startups aren’t tied to any entrenched IT architecture, they can accelerate cutting-edge product and service development.
The agile infrastructure of fintech startups has been proven to improve productivity by 25 to 30% within 6 to 18 months. CMIPs are already being empowered by fintech startups towards solving many of their challenges and are poised to make a significant impact on the capital markets industry. What they are not as certain about is knowing which specific technologies hold the key to helping them most efficiently resolve their challenges and the best collaboration methods when working with fintech firms.
Balancing the Equation
Sopnendu Mohanty, the Chief Fintech Officer at the Monetary Authority of Singapore (MAS), stated that while we normally understand fintech as a technology firm performing banking activities, the reality is only a fraction operate within the banking segment. Most startups are assisting in the digitization of banks. And while mergers and acquisitions by larger firms have been thought to benefit startups, recent developments along the CMI value chain suggests quite the reverse.
Most startups assist banks by modernizing their dated infrastructure by becoming vendors and partners. Alliances such as the one between ING and the automated lending platform Kabbage are proof that conventional banks are looking to present new offerings to their customer base, and move to a more streamlined, agile, ‘plug-and-play’ model.
They will continue to drive greater productivity in post-trade services like regulatory reporting and risk management by deploying automation and robotics. We are already witnessing capital markets seeking our next-gen artificial intelligence solutions to cope with their growing data streams and blockchain to optimize their transaction exchanges. Startups are well-positioned to bring in new digital markets, serve as an alternative to conventional access to capital and enhance the security of global financial systems.
Making Finance Relevant
The disruption brought about by fintech startups is indicative of the agile, mobile-first approach that customers across most sectors want. For the record, smaller startup fintech companies are the most active in the CMI space. Despite their considerable data pools and comprehensive resources, technology giants are being given a run for their money by these startups due to their enhanced agility and lack of legacy burdens.
They operate with existing providers rather than against them, and most of their products act as components within the industry, making conciliation much easier. Fintech startups have also been heavily backed by venture capital investment from the CMI sector and this trend is also on the rise. “The Fintech 250” list of 2018 by CBInsights’ further reinforces this reality, with Kabbage, incidentally, being the best-funded fintech startup under business lending and financing.
Ultimately, fintech startups are defying the norm by creating a space for established financial giants to leverage new technologies in a way that will bring about radical but meaningful change. There is no denying that fintech companies will continue to pioneer and outpace traditional financial giants as their technological innovation brings an unparalleled depth of value for capital markets in the 21 st century.