The Financial Times have reported on recent Boston ConsuIting Group research that has identified that investment banks are making only small investments into new technology companies which are focusing on innovative capital markets technology.
“Start-ups concentrating on capital markets activities — such as finding cheaper ways to trade shares — attracted just 4 per cent of the $96bn invested in financial technology, or fintech, since 2000, according to research from Boston Consulting Group”.
It has been well publicised that the traditional banks across Europe have significant legacy issues with outdated technology platforms that make it difficult for them to make the changes they need to. Their customers have digital expectations that current online banking services often fail to deliver. The introduction of new legislation such as PSD2 that will give customers the right to open up their bank accounts to other financial services firms. This creates an opportunity and threat to banks because to fully take advantage of this change of legislation new technology will be required.
The BCG research has revealed that the vast majority of bank investment goes to funding start ups in the payments and lending space, where online players such as TransferWise and Funding Circle are now well established. This follows their search for yield in this period of low interest rate. It's argued however that it may be better placed on innovative start-ups that help financial markets businesses to cut costs. Profits have been hit by regulation since the 2008 financial crisis, which added huge costs and banned banks from the once-lucrative activity of trading on their own account.
The Boston Consulting Group report reports bank backing is particularly important for innovative capital markets start ups and technology providers, since banks are best placed to “pick the winners” in a complex industry. BCG said fintech solutions could lower costs in some areas by more than 50 per cent.
The findings on the lack of investment in capital markets fintech are striking given the need for
“Enormous opportunity exists from the collaboration of established capital markets players such as investment banks with young fintech companies, but the potential is far from being realised,” BCG said. “Banks and the entire capital markets ecosystem must take action now in order to gain the considerable benefits achievable.”
Banks and the entire capital markets ecosystem must take action now in order to gain the considerable benefits achievable suggests Boston Consulting Group, Philippe Morel, one of the report’s authors. He has said that the BCG could not estimate the total amount that banks could save by using fintech since it was hard to judge whether start-ups could live up to promises of reducing costs in some areas by 80 to 90 per cent.
There is also debate about how deeply fintech can penetrate banks. The researchers found that a large portion of capital markets’ costs, including 75 per cent of IT costs, are “non-differentiating” — which can be handed over to a fintech without losing a competitive edge.
But trust remains an issue, according to BCG. “A major challenge in adopting innovative solutions today is building trust,” BCG said. “The potential of regulatory accreditation can quickly raise fintech credibility.” As well as cutting costs, BCG said fintech could also be used to improve bank services by tracking client satisfaction and creating a more personalised experience — for example, Goldman Sachs’ collaboration with Motif Capital to issue structured products tailored to the thematic views of individual clients.
Grow Advisors regularly meet new technology providers who are developing services that are giving consumers and businesses opportunities to source debt in cost effective ways that bypass traditional lenders. These lenders boast innovative ways to carry out credit checks and to underwrite loans that speeds decision making. If these processes were replicated and implemented by traditional banks, the likelihood is that consumers and businesses would stick with the big banks. Do the banks have the vision to support this innovation or will they fall into the trap of the old adage adapt or die?