CAPITAL MARKET INFRASTRUCTURE - A MAJOR FINTECH OPPORTUNITY
Top investment banks in the US are investing in technology to upgrade their services. Goldman-Sachs is investing in consumer facing tech that will help the company scale its digital bank, Marcus. Both Goldman-Sachs and PNC have recently invested in robotic process automation (RPA) software called Automation Anywhere and Workfusion, respectively. The investment banking and capital markets industry are investing heavily in FinTech start-ups. Technology has been the key driver of capital market efficiency for quite some time.
Both the investors in the market and the capital market infrastructure providers (CMIPs) that operate the exchanges and other trading venues, securities and depositories, central counterparts, index providers and data and analytics companies are increasingly relying on technology. With fintech firms bringing in new technologies to the market, the impact is happening even faster and in greater magnitude. Hundreds of fintech firms are focussing on capital market infrastructure (CMI), and even CMIPs have realized that fintech will greatly influence the market in the near future.
It is true that fintech investments in the broader financial sector has seen a gradual dip since 2015 due to caution from investors regarding an uncertain macroeconomic environment. But the growth trajectory of CMI fintech has been quite steep.
Fintech themes shaping CMI value chain
There are four fintech themes that are shaping the CMI value chain and have been instrumental in increasing productivity, lowering cost, and generating new revenue sources:
- Rapid growth is anticipated in advanced analytics and artificial intelligence as the amount of data navigating through capital markets grow. Also, there is an increased interest in the application of advanced analytics to finance, market, and economic data.
- A host of CMI applications has seen the utility of distributed ledger technology and use cases include learning and settlement, alternatives to the traditional markets for access to capital (initial coin offerings), and new digital markets.
- Innovative technologies such as cloud and quantum computing, applied by fintech firms are increasing the efficiency in the capital market. Fintech firms are driving depth in traded markets and expansion towards new asset classes.
- Automation and robotics will boost productivity in post-trade services. A separate set of regulatory tech firms will bring efficiency and uniformity to regulatory reporting and risk management.
Fintech start-ups have been most active in the CMI space. Most of these firms are developing products as components within the CMI market and are currently working in collaboration with the existing providers rather than trying to gain new clients. The big tech giants are yet to make their way into the CMI industry, but their enormous capital resources, world-class analytical capabilities and deep data pools, will significantly disrupt the capital market infrastructure space.
CMIPs are looking forward to collaborating with fintech start-ups in order to develop internal technological capabilities that can help them have an edge over others. It is a belief that the best way to leverage the advantages of fintech is through collaboration and joint ventures as that can ameliorate the shortage of resources and limitations of developing solutions internally. Indeed, the fintech landscape is evolving at an accelerating speed with new ideas being developed and deployed instantaneously. However, for a fruitful collaboration CMIPs need to determine which projects need collaboration with fintechs and how they are aligned to the CMIP’s strategy and operations.