The FinTech scene in the asset management and capital markets space is, as it stands, relatively small, with the majority of focus for FinTech development going to the retail and corporate banking segments. The domain remains promising however, according to a new study, with capital markets players pouring money into FinTechs that show promise earlier than venture capital backed funding.
FinTechs create considerable risks and opportunities for financial services incumbents, threatening, among others, to disrupt markets on the one side and offering incumbents with opportunities to, among others, improve their business performance, on the other. The FinTech industry remains diverse however, with the limelight tending to go to propositions in the areas of banking (retail/corporate), payments and blockchain.
A new report from The Boston Consulting Group (BCG) looks into FinTech activity in the capital markets (CM) space – the research is based on the study of a database including more than 8,000 FinTechs.
The study highlights that there have broadly been three waves of FinTech development since the beginning of financial services computerisation in the early seventies. The first wave generated around 19% of FinTechs, and lasted until the 2000 .com bubble, the period focused primarily on enabling the market, including proposition is the areas of market data, news distribution, risk management, and core processes. The second wave, which lasted from 2000 until the financial crisis, saw around 25% of all founded FinTechs and was primarily focused on e-trading, including the emergence of high frequency trading and execution platforms.
The latest wave of FinTechs, which followed the economic crisis, saw the number of new firms explode to more than 50% of the total in just eight years; many of the new companies are focused on fixing post crisis challenges faced by institutions, from falling revenues to traversing complexity, among others. The firm notes that the latest wave of FinTechs is in part fuelled by incumbent banks’ transformation in the digital domain, with their increased dependence on digital technologies creating opportunities for innovative solutions in the space.
The research notes however, that when it comes to capital market FinTech propositions, their number represents a small portion of the wider FinTech market in terms of investment. Retail banking and corporate banking have seen the largest investments as a share of total investment, both in terms of the number of Fintechs being developed, H1 2016 saw 40 retail banking and 45 corporate banking propositions form, compared to just 10 for the CM ecosystem.
In terms of equity funding, the CM FinTech ecosystem saw a tiny 5% of all funding cumulatively between 2000 and 2016 H1, even while the industry makes up around 16% of the total $3.67 trillion financial services asset pool. In terms of distribution of funding in the CM space, which totalled around $4 billion covering 569 FinTechs, the largest proportion of funds by far went to execution focused ($2.2 billion) and pre-trade focused ($1.1 billion) FinTechs. Support focused startups picked up the least funding, at around $115 million across 55 startups.
The research also found that the CM FinTech industry appears to investors and entrepreneurs as too risky, due to its relatively highly regulated and specialised conditions, and few incumbent players with whom to engage. That perception however, may miss the mark, the firm's research notes that the industry has thrived in recent years. The averaging funding size has, like much of the rest of the FinTech landscape, seen considerable increases. Particularly the CM industry itself has poured money into viable propositions, at an average of $56 million in 2015.
The research into the industry highlights that companies that are able to attract funding from the CM industry itself tend to reach maturity more quickly, hitting key milestones, such as seed and round A funding three months and more than a year earlier respectively. While M&A, from initial funding, tends to take place after six, rather than seven years.
The research further considered how key institutions in the financial services domain are tending to engage with FinTechs. Banks, BCG finds, are most keen on access through incubators and accelerators, and venturing – engaging 161 and 124 through the means respectively. Information services providers are the most active in the M&A space to engage with FinTechs, although they too leverage accelerators and incubators, venturing and strategic partnerships. Exchanges tend to engage with FinTechs through M&A and strategic partnerships.
In the CM space however, the most promising route to engagement for FinTechs is through M&A, with 53% of FinTechs engaged that way between 2010 and 2016. Venturing takes the second spot, on 19%, followed by R&D and strategic partnerships at 15% and 17% respectively. Few engagements result from incubators and accelerators.