Partnerships Key To Fintech Success
Joint ventures and partnerships between fintechs and incumbent market infrastructure providers are key to gaining share as over-the-counter products shift to electronic trading according to the World Economic Forum.
The WEF said in a report, Beyond Fintech: A Pragmatic Assessment of Disruptive Potential in Financial Services, that new market platforms have rarely challenged incumbents, and joint ventures and partnerships are the most successful path to scaling up.
Rob Galaski, Partner, Americas FSI Regional Leader, Deloitte Canada, and co-author of the report, said in a statement: “Fintechs have changed the basis of competition in financial services, but not the competitive landscape. Fintechs now define the tempo and direction of innovation in financial services, but high customer switching costs and the rapid response of incumbents has challenged their ability to scale”.
The study continued that even when significant efficiencies exist on new trading platforms, incumbents may find it too expensive to switch and are reluctant to disturb the network of individual and institutional relationships characterizing capital markets
“New technological solutions alone are insufficient to enable the creation of new market infrastructure or to drive significant changes in existing infrastructure; this will make “minimum viable ecosystems” of cooperating stakeholders critical to development,” added the WEF. “Leading players from both the public and private sphere will seek to actively participate in and shape the direction of these stakeholder groups.”
The report gave the example of such a partnership between Euronext, the pan-European exchange, and Algomi, the new bond information network. “It will create a network of centralized information venues, turning disparate data into trade opportunities between counterparties yet maintaining the current client‐to‐dealer market structure,” added the WEF.
In March Euronext expanded its joint venture with Algomi from outside Europe and invested $10m in a minority stake. The partnership will involve working closely with regional exchanges and Euronext is working to establish an Automated Trading System in North America.
Stu Taylor, co-founder and chief executive of Algomi, told Markets Media at the time: “Partnering with an established exchange to provide fixed income traders with a single resource for price discovery, trade execution and settlement on illiquid bonds is a major part of our mission to unlock liquidity.”
In May Algomi also partnered with established fund manager AllianceBernstein to provide an aggregated picture of bond liquidity, which the buyside needs to trade efficiently in an increasingly fragmented and complex market. Algomi said it would acquire and distribute AllianceBernstein’s Automated Liquidity Filtering & Analytics to provide an aggregated picture of bond liquidity signals across multiple electronic venues, message platforms and direct dealer inventories. AllianceBernstein had initially created and developed ALFA as an in-house liquidity tool to provide aggregated real-time information on liquidity and trade intent.
The WEF continued that regulation and technological advancements are driving efficiencies, which will put pressure on incumbents to consolidate their positions and shorten the value chain. “Forward‐looking firms will seek to position themselves in areas that will continue to add value, including areas currently occupied by other firms,” said the study.
The report added that incumbents have recognised that new technology could lead to the elimination of many existing roles in the infrastructure of capital markets by enabling real‐time processes and more direct connectivity. As a result, market infrastructure providers have been disrupting themselves by investing in new business models around artificial intelligence and distributed ledger technology.
The report gave the example of the Depository Trust & Clearing Corporation using blockchain technology to rebuild its Trade Information Warehouse, responsible for processing $11 trillion worth of credit default swaps. The platform is slated to go live in the first quarter of next year.
Robert Palatnick, chief technology architect at DTCC, said at a conference in May: “We have disrupted ourselves multiple times. We’re industry owned, so the goal and intent is to work with the industry to develop new technologies that can solve operational challenges while reducing costs and risks.”
The WEF also gave the example of Thomson Reuters launching BlockOneIQ in June. The report described BlockOneIQ as a “smart oracle” that provides users with cryptographic proof of the source of external securities pricing data.
“As profitability in core businesses erodes, the data flows of incumbent market infrastructure providers could create new sources of revenue,” added the WEF. “However, doing so will require extensive industry cooperation between different data providers, including complementary infrastructure and data‐sharing agreements.”
David Craig, president, Financial & Risk Division, Thomson Reuters, said in a statement: “Technology is more than ever defining customer expectations and, in many cases, radically improving customer experience. This means the ‘incumbents’ who embrace change by partnering and collaborating in open ecosystems with fintechs will be the winners of the future.”
Read the full WEF report here.