Fintech startups started out with a mandate to upend the established order of the finance world, dominated by large institutions and traditional practices, and bring new solutions to old problems. Over time, this evolved into opportunities for synergy and collaborations.
Where incumbent financial institutions were either indifferent or hostile to fintech firms’ efforts, in recent years they started welcoming the wave of fresh ideas into the industry. In some sectors, like online payments and international money transfers, fintech startups have been everything from outright competitors to valuable partners.
Now, capital markets are experiencing their own fintech moment. Startups that are redefining investment, data analysis, research, and more, are catching the eye of age-old, heavily regulated institutions like exchanges and investment banks.
A report by EY outlines that financial institutions which are part of the capital markets infrastructure (CMI) are looking to fintech to help them stand against an increasingly challenging environment.
“Faced with stubbornly high structural costs, heavy capital charges and stagnant revenues, investment banks’ returns on equity (ROE) continue to disappoint. While steps are being taken to transform culture and rebuild trust, progress in these areas takes time,” the report says.
According to the report, rising global trends favour collaboration between traditional players and fintechs. These trends are: a) the increase of entrepreneurial activity worldwide, b) the rise of truly global economies enabled by favourable demographics and growth rates in emerging markets, and c) the convergence of technologies like cloud, big data, mobile, and social.
Cooperation Instead of Competition
As in other areas, fintech startups in the CMI space create value by filling gaps in the value chain or addressing inefficiencies in the market. Incumbents benefit from fintechs’ fresh thinking and fast pace, offering their superior resources and domain expertise in return.
A study run by the World Federation of Exchanges (WFE) and McKinsey found that most incumbents in CMI think of fintechs as potential partners with whom to unlock new revenues or enhance productivity. Only a very small percentage thought of fintechs as direct competitors.
This cooperation can take different shapes, depending on how closely incumbents want to work with fintechs. The WFE survey showed that most participants prefer to collaborate with such firms, while fewer of them engage in joint ventures and in minority or majority investments.
Just last month, Smartkarma received a strategic investment from the Singapore Exchange (SGX). This will allow the Exchange’s listed and upcoming companies access to Smartkarma’s network of Insight Providers and institutional investors, through Smartkarma’s Corporate Solutions range of services.
For SGX, this minority investment is a strategic move that springs from upheaval in the global investment research market. After MiFID II in Europe, the need for more transparency on research costs and for more independent research, especially on small- and mid-cap companies, has become more pressing worldwide.
The move rides on “a growing trend towards self-directed and independent research, creating growth opportunities for Smartkarma’s platform that facilitates the use of alternative data and wisdom sourcing in investment research,” according to SGX’s official statement.
Earlier this year, Deutsche Börse announced a partnership with Swiss and Singapore-based startup Sygnum, as well as IT firm Swisscom, to develop a digital asset infrastructure. The result of their collaboration is expected to be a marketplace for the issuance, custody, access to liquidity, and banking services of digital assets using distributed ledger technology (DLT).
“Continuing our investments in new technologies and driving the development around DLT forward is a key focus of Deutsche Börse Group,” says Jens Hachmeister, Managing Director, DLT, Crypto Assets and New Market Structure at Deutsche Börse.
While it’s nowhere near a startup, the London Stock Exchange’s move to acquire Refinitiv for US$27 billion also highlights global exchanges’ need to tap into tech-powered intelligence and solutions.
Future of Finance
Such trends will continue as global developments put up ever-increasing challenges in front of capital markets. From trade war-born uncertainty to a potential recession to new players arising in the world economy, the needs of incumbents are several.
Through these collaborations, they can reduce costs, get unprecedented insights with the use of data and artificial intelligence, predict coming trends and customer needs, and automate processes that previously consumed time and resources.
According to the McKinsey report, fintech in CMI may not be as far along as other sectors and the benefits may not seem as tangible just yet. But increased investment in the sector means that early movers will reap the rewards.
“Those incumbents that do not recognise its impact on their business, and fail to take a proactive stance, face a future that will be shaped by their peers and competitors. For investment in fintech, time is of the essence,” the report concludes.
Find out more about how your company can be part of the fintech reinvention of capital markets. Sign up for a FREE account on Smartkarma’s Corporate Solutions, a brand-new range of services for C-Suite and Investor Relations personnel of listed companies that’s been designed to help IR professionals establish and maintain valuable connections to the investment and analyst communities.
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