Investment banks are making only paltry investments in start-ups focused on innovative capital markets technology in spite of the opportunity to use such “fintech” to dramatically lower their costs.
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.
The vast majority of the funding goes to payments and lending, where online players such as TransferWise and Funding Circle are becoming well established.
Much of the investment in fintech comes from banks, who help start-ups develop products and give them anchor clients to start.
The Boston Consulting Group report said bank backing is particularly important for innovative capital markets ventures, 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 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.
“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.”
Philippe Morel, one of the report’s authors, said that 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 can 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.