Fintech in Capital Markets: A Land of Opportunity
The financial technology (fintech) phenomenon first started to evolve in the capital markets (CM) industry more than 40 years ago. Today, accelerated both by the electronification of trading in the 1990s and the subsequent thrust of the entire financial services industry toward digitization, fintechs—which we define as firms that use innovative technology at scale to either enable or compete with other financial institutions—have experienced exponential growth in the CM domain.
The most prominent CM fintechs have been strongly supported and engaged by the CM ecosystem, which includes players such as investment banks, custodians, exchanges, clearing-houses, and CM-focused information service providers. Such players have been, and will remain, best positioned to pick the most promising fintechs for potential collaboration.
Yet despite rapid growth, CM fintechs have been attracting less than their fair share of venture capital (VC) funding. This shortfall is partly due to the highly specialized and regulated nature of capital markets, which may hinder outside investors. Indeed, when fintechs are backed by incumbent banks, they attract greater funding and mature more quickly than when they are backed solely by VC firms. Incumbents that invest actively can shape business models and help fintechs evolve into collaborative suppliers rather than disruptors. Moreover, the funding that CM fintechs have received to date has been heavily focused on front-office initiatives within execution and pre-trade. Funding for post-trade activities has been much more modest, with investment concentrated in a select number of fintechs, resulting in the highest average ratio of funding per company.
Simply put, fintechs focus on creating new value propositions or improving existing ones. They help build capabilities that can enhance client relationships, reduce costs through automation and simplification, and facilitate regulatory compliance. They also enable disaggregation of the value chain as they become more embedded in the supply chain.
Nonetheless, in order for the fintech boom to realize its full potential, a number of barriers must be overcome in the way that fintechs relate to investment banks and the CM ecosystem as a whole. These hurdles exist in the areas of simplifying IT architecture, developing industry standards, improving collaboration among players, and mitigating the risks of working with vendors, among others. Moreover, inertia on the part of incumbents can have a dire consequence: the inability to compete with new entrants that use cutting-edge technologies to reverse banks’ traditional competitive advantage. Market structure changes brought on by technology, regulation, and shifting client needs make it critical for incumbent banks to take action now.
In addition, as banks begin to think of themselves more as data and technology companies, they need to start managing their IT stacks, and the data and analytics within them, as assets that can be commercialized. Banks can leverage the experience gained in such areas as execution algorithms, direct-market-access connectivity, and securities services, and explore opportunities for unconventional partnerships. In order to move forward efficiently and effectively, however, banks must fully grasp the history and scope of the fintech domain. In this report’s analysis of the rapidly evolving CM fintech landscape, we used the Fintech Control Tower proprietary database of Expand Research, a BCG subsidiary. The database covers more than 8,000 fintechs.