The importance of fintech was highlighted recently when Bank of England governor Mark Carney made it the key theme of his Mansion House bankers’ dinner, the annual event where the bank and the UK Treasury set out their objectives for the next 12 months. 

Likewise, earlier this year, Andrew Hauser, the Bank of England’s executive director for banking, payments and financial resilience confirmed that the bank was looking at applications of blockchain technology in central banking. 

Even though there is a consensus around the cost savings and other benefits that blockchain could bring to the both the buy side and the sell side, GreySpark Partners fintech analyst consultant William Benattar says that it still needs to address real financial world problems to deliver. 

“Most companies in the blockchain space are focused on prototyping concepts and converting them to production-ready applications,” he says. “For example, Digital Assets and SETL (OpenCSD), companies focused on optimising clearing and settlement, are testing their solutions on the Australian market.” 

The development that Jennifer Hanes, head of investment management and operations buy-side solutions at FIS, is most excited about is digitalisation of data or the ability for asset managers to deliver meaningful data to clients rather than simply static reports. 

“Investors are demanding more frequent and flexible web-based access to investment information and increasingly technology solutions can help enable this,” she says. “We are also seeing a trend towards digitalisation of the process. 

By bringing together integrated efficiency tools for exception management and workflow and for handling functions such as reconciliation, corporate actions processing and financial reporting, firms are able to drive down operating costs.” 

Bill Stone, chairman and CEO of SS&C Technologies, says mobility is a key requirement with investors demanding access to information anywhere, anytime. Meanwhile, Nick Parsons, global chief technology officer at Bravura Solutions suggests the challenge for technology vendors is to integrate the concepts of chat-bots and robo-advice to produce a service that works for the non-professional investor. 

KPMG’s The Pulse of Fintech Q1 2016 report notes that investment in roboadvisory is gaining momentum globally and especially in the US, although the report authors also observe that it is challenging to make the economics associated with a standalone roboadvisory platform function efficiently. 

Robo-advisory partnerships 

As a result, there is likely to be a continued evolution of the go-tomarket and distribution strategies for these solutions, with significant growth expected in partnerships between robo-advisory platforms and big banks. 

The use of these platforms as a tool for financial advisors rather than a directto- consumer offering is expected to increase and the next generation of digitalised advice platforms will provide advice across a portfolio, not just platform-managed assets. 

The utilisation of analytical tools has long been established in areas of portfolio management, but will spread into wider areas of the business, from sales and marketing through to operations and this will allow firms to both better manage existing operations and also better model and predict future business in order to be prepared and aligned, adds Steve Young, principal at Citisoft. 

“The ability to apply analytics to anything from trade execution and overall trader performance to finding inefficiencies in a trading workflow offers firms the kind of governance and oversight that was simply not possible in the past,” observes Michael Speranza, senior vice president of corporate strategy and marketing at IPC Systems. 

“With MiFID II requiring all communications that result in a trade to be recorded and stored – from fixed line and mobile calls to emails and instant messages – being able to use data in the right way is even more crucial,” he continues. “Beyond the compliance department, mining the vast amount of communications data being captured can be a significant benefit to organisations’ wider business strategy.” 

Another interesting area of financial technology is regulatory technology or regtech. According to Alex Kwiatkowski, senior strategist banking & digital channels at Misys, there are two reasons why regulators – who have traditionally avoided technology like the plague – are interested in IT-related issues and developments. One is protectionist, while the other relates to innovation. 

“Where the former is concerned, regulators are finally waking up to the idea that legacy technology represents a systemic risk, given that systems are aging rapidly and performing tasks which they were never designed for,” he explains. “A ‘do nothing’ policy when it comes to replacement and renovation of old hardware and software is not a viable long-term strategy.” 

Where innovation is involved, regulators find themselves on the back foot, although there are signs of this information gap being closed as progressive regulators such as the UK’s FCA and MAS in Singapore have started programmes to get closer to fintech innovation. 

“A steady stream of overseers are also creating fintech task forces to understand the capabilities and implications of new technologies,” adds Kwiatkowski. “In the case of the FCA and MAS, it is about encouraging innovation. Regtech is at an early stage in development, but is certain to grow in prominence over the next 12 to 18 months.”

Regulatory framework 

According to Benattar, regtech should provide a framework that will not only help innovators to thrive but also help prevent the next financial crisis. The ecosystem of companies is composed of start-ups focused on automating and digitalising regulatory compliance processes such as AML, KYC and risk and post-trade services. 

“Initiatives driven by regulators are currently limited and no specific systems have really stood out from the crowd,” he says. “Regulators’ top priority is to develop a better understanding and regulate disruptive solutions that have proven they could address real market needs.” 

Technology tools that allow firms to develop a holistic and consistent view of investment risk across the front and middle office can add efficiency, enable more effective regulatory compliance and improve risk management practices by ensuring a single view of risk across  the enterprise, according to Hanes. 

Where cost is an issue, application programming interface or API offerings are well suited to smaller companies says Leda Glyptis, director at Sapient Global Markets. “API connectivity also permits businesses with various specialisations to integrate easily, speedily and robustly with clients of all sizes. 

The catch is that the traditional financial services instinct is to buy or build and have a proprietary stack of technology servicing the entire value chain. If smaller firms seek to build or buy every piece of code their new service architecture requires then that will be extremely and unnecessarily expensive.” 

Small and mid-sized organisations will have to look to infrastructure and technology outsourcing to cope with regulatory requirements, changing customer demands, technology evolution and overall business trend, reckons Objectway chief business development officer, Peter Schramme. 

Benattar observes that since most fintech companies are focused on gaining market share and generating traction, they are following a so-called penetration pricing strategy, where products and services are priced relatively low. Because they are free from legacy systems, they can build operating systems that are less costly than those of incumbents. 

“They are also flexible because most solutions are offered as SaaS, meaning that the software and its associated data are hosted centrally and accessed by users through a web-based platform,” he says. 

“This results in smoother and shorter integration and implementation. In addition, SaaS products and services usually make it very easy for customers to switch solutions.” 

However, Young expresses concern that innovation must come from either firms that bring in technology from other areas or those that embrace and support small emerging technology and vendors. 

“In recent years most large asset management firms have introduced procurement procedures that make it almost impossible to support start-ups and small firms,” he says. “This is an area where small and medium-sized firms can gain competitive advantage by proactively looking for smart technology from these suppliers – their larger competitors will usually not be able to engage until the supplier is established.” 

Leverage advantage 

Young expects this situation to change as the digital and technology revolution takes hold, so smaller firms must make the most of their head-start. 

Sam Bellamy, vice president and CIO of investment services at Fiserv adds that banks are being held back by rigorous procurement processes, compliance requirements and concerns of impact on legacy product offerings, resulting in delays to contracting with small and agile players. 

“Leading technology providers could come into play by providing a link and access point to innovation, offering an integration access point and capability almost as a managed service for banks,” he suggests. 

“By using their existing relationships with leading technology providers, financial institutions can solve certain legacy issues and those encountered in dealing with smaller organisations, to bridge the gap between the latest technologies offered by innovative start-ups and their customers.” 

Schramme says the relationship between financial institutions and their technology vendor is becoming increasingly business-critical. “Infrastructure and technology typically represent long-term investments and technology evolution determines whether a financial institution is leading the market or lagging behind.” 

Procurement departments need to learn fast and start moving away from the traditional assessments and the comfort of centralisation towards selection criteria that require small, niche, young players to be given airtime, suggests Glyptis. “If a proposition is robust and relevant, the maturity or size of the vendor should not matter.” 

Institutions need to be able to trust that the technology they are investing in is adequate not just for current laws, but for those further down the line, adds Speranza. “It is crucial that financial institutions are receiving ongoing support and guidance from their vendors ahead of these big changes.” 

Parsons suggests that chief information officers need to be able to distinguish between suppliers that provide a strategic edge and support business objectives and those that provide the operational backbone. 

Relationships are changing in line with broadening of the fintech ecosystem, which encourages far greater degrees of collaboration between parties, says Kwiatkowski. 

“To achieve success, firms need to work with a broad range of IT providers to find new ways to conduct business activities, with an equally wide range of software applications interacting and interoperating to achieve operational objectives. A collaborative approach to innovation will deliver far greater benefits.” 

According to the PwC report Blurred lines: How FinTech is shaping financial services, financial technology represents an opportunity for incumbents to improve their traditional offerings and increase customer retention while simplifying and rationalising their core processes, reducing inefficiencies in their operations. 

The report concludes that while fintech will require a fundamental shift in identity and purpose for many traditional financial institutions, it cannot be ignored.