This year financial technology— fintech— firms will begin to target and invade big investment banks’ business models; taking on things like wealth management, private investment and small business lending.
Since the credit crisis of 2008-2009, investment banks have spent much of their time and energy on regulatory compliance, leaving them “on the back foot” innovation-wise.
“Faced with growing regulatory demands in recent years, investment in new technology has had to take a back seat,” Broadridge Financial Solutions said.
In the meantime, fintech companies have risen to disrupt retail banking and investing business models, with lower cost banking and financial planning websites. To date they have only scratched the surface of the behemoth investment banks’ businesses, but this is about to change.
Financial technology expert Chris Skinner said that there are three emerging markets where fintech is already making inroads into investment banking: social trading strategies, market funding platforms, and market data services.
He cited early innovators such as ZuluTrader, eToro and StockTwits as innovators in social trading, disrupting traditional broker roles, and there are dozens more coming up through the ranks.
In the market data space there are innovators such as Contix, which mines social and traditional media posts for tidbits that signal early breaking financial news. Its event detection platform sends out real-time alerts to traders, helping them to get ahead of the pack.
Services such as Contix’s combined with social trading apps can further disrupt the traditional broker-advice-trade model of investment banks and brokerages.
Market funding platforms such as Kabbage and Funding Circle are not just offering seed money for start-ups, they are also getting funding “backing” from large institutional investors. Investing in innovative start-ups is traditionally one of the roles of investment banks.
Banks are facing other threats from fintech; technology staffers, eyeing these new fintech firms encroaching on their space, are understandably frustrated that their companies are no longer on the cutting edge and are jumping ship to join the exciting world of fintech.
“Banks have to find a way to make the roles they have to offer more attractive than those opportunities being created by this new breed of start-ups,” said Adam Jackson, director at recruitment firm Astbury Marsden.
Meanwhile, investment banks are aware that fintech offers fundamental building blocks for the future. They are backing them as strategic investments, but also buying them as internal solutions.
Goldman Sachs led a $15m round of financing in Kensho, an analytics platform that can instantly answer millions of complex financial questions by automating previously human-intensive research—and the bank will roll out the platform across its business as well as to some of its big clients, according to the FT.
Fintech will not just disrupt investment banking; it will become an important part of it. A recent Broadridge Financial Solutions capital markets outlook, said in Forbes that banks can collectively save billions by way of new FinTech investments.
Finech may initially be a threat to investment banks, but it appears it will eventually be a major opportunity.