Until recently, the FinTech community globally has been deeply vested in conquering payments and lending businesses. In fact, payments and lending have steadily been the most funded and represented FinTech segments around the world. In the years ahead, however, the balance of attention and innovation adoption is expected to shift significantly with capital markets and investment banking seeing the increase of attention and development employing innovative technologies.
Technology serves as a key driver of value migration in the capital markets industry. While speed, informational advantage, efficient customer flow, and effective use of proprietary capital have always been essential aspects of a profitable market-making business, the way these elements are implemented is changing dramatically, BCG suggests in its report on capital markets published in May 2017.
“Improvements in technology have enhanced the ability of firms of all sizes to directly access institutional markets, analyze large swaths of public trading data, and use analytics underpinned by predictive algorithms to create arbitrage opportunities, often involving little or no risk to capital. Technological change, in conjunction with regulation, has also accelerated the electronification of secondary-market trading, which is both forcing investment banks to adapt their business models and bringing new types of competitors into the mix.”
Professionals already note increased activity around solutions to complex front-, middle- and back-office problems. These solutions are using technological advances such as AI, Robotic Process Automation (RPA), distributed ledgers and cloud technologies, among others, to deliver innovation that was previously hard to achieve.
AI seems to be one of the most interesting and potent technologies that are expected to transform capital markets. “AI solutions can lower the cost of many processes throughout the trade lifecycle, but also tackle the revenue side of the equation: research, sales, and trading,” says Joséphine de Chazournes, Senior Analyst with Celent’s Securities and Investments practice. “The deepest solutions that will combine big data analysis, correlation, and causal-based technologies on data, text, image, and voice will be more powerful in the future,” she adds.
Considering the tremendous potential for AI applications in the capital markets, professionals expect spending in the field to increase by 75% from 2017 to 2021, reaching $2.8 billion. Cognitive analytics and ML solutions will take the lion’s share of this investment. Investments by financial firms in AI startups are also expected to continue due to the limited talent pool in the space, professionals suggest.
Partnerships between AI startups and financial institutions are certainly a win-win: the former bring tech expertise, and the latter have business knowledge and data. For those interested in exploring opportunities with AI in capital markets, New York will be hosting an event in fall 2017 called Artificial Intelligence & Data Science in Capital Markets, bringing together executives from TABB Group, JP Morgan Chase & Co., Guggenheim Partners, BlackRock, Morgan Stanley, Quandl, Twitter, Goldman Sachs, and more.
The opportunities for FinTech innovation in capital markets and investment banking
The capital markets ecosystem, as a whole, continued to grow in 2016. The total industry revenues rose to $656 billion, compared to $624 billion in 2015, an increase of 5%. Key challenges consistently faced by the leaders in capital markets and investment banking represent the opportunities for technology innovators:
- Identifying the sources of future growth (revenues in Equity capital markets (ECM) were down 35% in 2016, but are not anticipated to erode further in 2017).
- Reducing structural costs: The barrier to improved cost performance is the huge expense associated with maintaining disparate systems, legacy landscapes, and manual processes. The simplification of investment banks’ IT estates is perceived to be the most difficult cost to address.
- Delivering regulatory-driven change at an acceptable cost.
- Rebuilding trust: One of the key factors in mitigating misconduct is to increase the accountability of the front office.
- Redistribution of resources and talent: Worldwide, by 2025, AI technologies are expected to reduce employees in the capital markets by 230,000 people. The asset management industry will shrink the most, with around 90,000 people being replaced by machines. On the other end, close to 30,000 new jobs will be created for technology and data providers who respond to the financial industry’s new requirements and demands.
The challenges and corresponding opportunities are certainly not exhaustive but do outline some of the most critical areas where investment banking has been traditionally shorthanded in solving issues.
Collaboration – not competition – is the way forward, and one of the global investment banks in Asia is ready to work with the best
While the vast majority of FinTech segments startups have been taking a competitive-first approach up until the last few years, in capital markets and investment banking, the situation is likely to be different due to high barriers to entry and regulatory specifics (Glass-Steagall). In capital markets and investment banking, startups and incumbents are making natural allies with beneficial outcomes for both parties – reducing costs for investment banks (and picking up their ROI from an average of 6.3% for top 14 global investment banks in 2015) and paving a way for disruptors into the industry hand in hand with large players.
Indeed, as David Rutter, Founder and CEO at R3 CEV, emphasizes, “We are at a point where we have an opportunity to reposition financial services. With the technology available, we can change the way transactions are done, reducing costs from dollars to pennies. Through collaboration, we have the opportunity not only to revive businesses that have died but also to create new ones that haven’t even been thought of.”
One of the most recent initiatives aimed to harness the value of collaborative innovation is the program launched by Nomura, Asia’s global investment bank. Nomura announced the Voyager – Nomura FinTech Partnership in India aimed at exploiting emerging technologies to help transform its businesses and services. Nomura is inviting entrepreneurs to participate in the program to build innovative solutions for capital markets and investment banking that can be deployed across the firm and financial industry. They are seeking to partner with startups offering innovative solutions leveraging on the following capabilities.
Speaking on the initiative, R K Rangan, President & CEO, Nomura Services India, said, “New technology, supported by an innovation-driven ecosystem, has resulted in an environment of increasing collaboration between new and traditional market players. Building on this momentum, Voyager is a program for startups to engage with Nomura to drive innovation through its global network."
"The program was launched in Mumbai and the event was widely attended by the significant members and thought leaders of the FinTech ecosystem. Commenting at the event," Nikhil Mehta, FinTech Lead and Executive Director, Nomura Services India said, "The main draw of Voyager would be the possibility of gaining Nomura as a potential client if the service or technology fits into the criteria of use cases we are looking at.”
To facilitate this program, a Nomura Innovation Centre (NICe) has been set up in the company premises in Powai, Mumbai. This will enable entrepreneurs to access Nomura resources and test their concepts and solutions leveraging the firm’s people, processes, and technology
Nomura has collaborated with PwC as a knowledge partner, and with Google, IBM and Amazon Internet Services Pvt. Ltd. to bring together industry expertise to the Voyager program, which will go through the following stages:
- Nomura will collect applications through May 19, 2017.
- The startups shortlisted for the PoC stage will be announced by June 30.
- The final startup cohort will be announced on September 30.
More information about the program can be found here.