Fintech has been viewed as a saviour in the battle to reduce costs and manage increasingly complex operational challenges in banking. 

Much of the activity is taking place within established firms, making the overall level of research funding hard to quantify. However, according to data from broker Peel Hunt, private investment into fintech soared to $32bn in 2014-15, a radical change from sub- $1bn in 2008. It calculates that for some types of finance it has grown much more rapidly, such as for peer-to-peer, which grew by 84% to £3.2bn in 2015 alone. 

Most visible has been the venture capital money pouring into payment systems, such as Coinbase and Circle, but enthusiasm for the power of fintech to transform the financial world has rubbed off on established firms in the sector, which are also trading on high multiples. Nasdaq-quoted SS&C Technologies, for example, trades on a PE ratio of 139. 

However, a number of tech companies have failed to reach their private valuations in their IPOs or have immediately fallen below their high-water marks in open trading. With valuations so high, some big investors have become nervous and have pulled out of funding rounds. 

On the whole, though, the risk of failure is lower in heavily institutionalised areas such as custody and settlement, where powerful prototypes such as SETL in settlement, and Nasdaq’s partnership with San Francisco-based start-up Chain in proxy-voting, are already in the works. 

Regulatory drivers 

A big driver is regulation and platforms are being developed, including by the big four of JPMorgan, BNY Mellon, State Street and Citi, with tools for UCITS, Solvency II, FATCA and other regulatory initiatives. “Systems that are able to comply with the complex regulatory environment, as governments around the world want reporting to be done more quickly and people protected more broadly, will be successful,” says Bill Stone, chairman and chief executive officer, SS&C Technologies. 

A key goal is to develop one set of synchronised data that asset managers can use to populate a variety of regulatory purposes.“If you think that 30% of AIFMD data is transformed data, you can see how having systems that can talk to each other is critical,” says Ralf Menegatti, product owner, asset management, EMEA, AxiomSL. “Also, for example, Solvency II requires asset managers to undertake a profound, detailed and complex extraction of data, and it is a totally new requirement.” 

Data analytics in fund management and custody are other areas of focus. “UCITS funds account for 80% of the market, and new custodian oversight duties and cashflow monitoring duties under UCITS V require the bringing together of all kinds of operational reports and data, which must be presented on one platform,” says Menegatti. “Currently most firms rely on Excel spreadsheets for these tasks but owing to its complexity, no vendor is yet offering a solution.” 

Investment book of record 

Asset managers, some of whom trade 5 million times a day, have high hopes for an explorable investment book of record (IBOR) to provide a single set of data that can feed through all the processes, instead of having to create separate data for different tasks. That database could then allow access to value-added services such as collateral management tools, risk management tools or financial reporting in real-time, perhaps on mobile devices such as an iPhone dashboard. 

“An IBOR for middle office services, such as collateral management, risk, performance and on-going reconciliation linked to the custodian, is becoming key,” says Tony Warren, head of buyside strategy, in the institutional and wholesale business at FIS. “Many of our clients are taking this up now, including the large global institutions, and we expect real-time intraday IBOR to become the norm in the next few years.” 

FIS is also implementing a workflow tool, which combines exception management and automates tasks across an organisation’s middle and back offices. The resulting data is then exposed to give clients and their customers an online dashboard of various processes throughout the day, such as the status of a product’s net asset value (NAV). 

Big Data 

Big Data and enhanced data management applications are providing fund managers with meaningful insights to sell on to clients almost as a by-product of the need for more effective regulatory reporting. For example RBC Investor & Treasury Services’ Fund Sales Intelligence service is based on interpreting the substantial amount of UCITS sales flow data it manages, enabling fund managers to understand how their global UCITS fund distribution performance compares to industry benchmarks, as well as providing access to market and macro-economic data. 

Warren believes there are potential niches for new start-ups in areas such as high watermark calculations in hedge funds, fee calculation, complex rebating and invoicing in accounting as well as financial reporting, particularly in the regulatory space. 

Changes in investment product design are also driving technology. FIS runs a research project called Asset Management 2020: A vision, which looks at future tech needs in the fund administration industry, and its findings indicate that owing to increased competition in the ETF arena, 20% of asset servicers anticipate a demand for valuing ETFs within an hour of close of relevant markets. 

Similarly, money market funds have largely moved from a daily constant NAV basis to variable intraday NAV which, without dedicated systems, creates real challenges. 

Better informed investors become more demanding, which in turn is driving fee pressure particularly for active funds. “It’s a roller coaster ride that is putting pressure on the whole industry over the mid-term,” says Warren. 

“This pressure rolls down hill – so asset managers are requesting lower costs from administration service providers and fintech can help the fund administration industry to keep costs down.” 

Fintech developments are also likely to have a transformational effect in emerging markets where many processes are still manual. “Currently, investors are seeking to gain exposure to new and emerging markets, but are faced with operational complexities in terms of valuation and servicing,” adds Igor Gramatikovski, chief business consultant, product management, SimCorp. “Investments in technology in these markets could mark a radical shift for the industry.” 

Blockchain 

In custody, many applications are looking at blockchain, a development that promises to diminish the cost and risks of data transfer, especially crossborder. One of the biggest projects is R3, a consortium of over 40 leading banks, working together to design advanced distributed ledger technologies. 

Smart contracts harnessing blockchain to store and manage contracts promise to be big disruptors. A wide range of groups such as SIX and Clearstream as well as institutions such as MIT are looking at these, as well as competition from outside the sector. 

“Every day we see new initiatives aimed at revolutionising custody and fund services – largely targeted at bringing increased efficiency to areas such as non-listed stocks and derivatives markets,” says Sebastien Nunes, head of innovation & fintech, BNP Paribas Securities Services. “In fact, at BNP Paribas we’ve recently partnered with a crowdfunding company called SmartAngels to do just that.” The partnership will use blockchain to provide a share registry for securities issued on the SmartAngels platform. 

Large venture capital investments are expected to produce the first tangible results of blockchain prototypes, as well as new distributed ledger technology standards in 2016 and 2017. However, the financial sector has begun to realise that blockchain is not a panacea. 

“Instead, we’ll see the number of use cases lowered and the industry will begin to develop a clearer view as to how blockchain might shorten operational cost budgets,” says Avi Ghosh, head of communications at SIX Securities Services. “Real business implementation and adaption for blockchain might take a few years yet. It is difficult to forecast beyond 2017 as we are in such a rapidly changing environment.” 

In collateral management, there are still around 30 central counterparty (CCPs) clearinghouses, so banks and broker-dealers have to find a solution. “Clearstream offers a solution, but like many we run the risk of being disintermediated by fintech,” says Philippe Seyll, co-CEO of Clearstream Banking Luxembourg, a subsidiary of Deutsche Börse. “Therefore we spend a lot of time and resources developing innovative solutions. Bankers are also working hard not to be Hooverised, and many have incubators as they do not want to be left out.” 

Artificial intelligence 

Robotics – or Artificial Intelligence – is a prominent trend being explored by startups focussed on offering low-cost online portfolios with minimal involvement from a human adviser. 

Alexandra Foster, head of insurance and strategy, global banking & financial markets, BT, points out that in the UK this is in part being driven by initiatives such as the Financial Advice Markets Review (FAMR), which looks to stimulate the development of affordable financial advice, and the Financial Conduct Authority’s (FCA) Project Innovate, which is encouraging businesses to introduce innovative financial products through its Tech Hub initiative. 

“The reality check, however, is that with all the regulatory challenges that lie ahead, there is precious little discretionary spend available to pursue a potential new idea unless the ROI has a short timeframe to payback or helps meet the core challenges of a business,” adds David Pearson, strategic business architect at Fidessa.