Technology inertia on the part of incumbent banks will have dire consequences, experts at Boston Consulting Group have warned.

Analysts at the firm argue that traditional players will soon be unable to compete with start-ups using cutting-edge tools to reverse the competitive advantage long-held by lenders.

“The capital markets industry is facing a perfect storm of multi-year revenue declines on the sell side, an exodus of financial talent and a wealth of maturing technologies,” notes BCG’s paper, entitled ‘Fintech in Capital Markets: A Land of Opportunity’.

“It is critical for incumbent banks to take action now to both protect their own interests and to boost the capital markets fintech ecosystem as a whole.”

As banks begin to think of themselves as more data technology companies, BCG’s research suggest they need to start managing their IT stack, and the data and analytics within it, as an asset that can be commercialised.

“They can leverage the experience gained in such areas as execution algorithms, direct market access connectivity, securities services and explore opportunities for unconventional partnerships," the white paper suggests. 

BGC’s experts claim to have seen evidence showing that fintechs supported by banks or other strategic players, such as exchanges, tend to attract more funding, reach maturity quicker and achieve greater success.

So far in 2016, the average funding for industry-backed fintechs was $24m, compared with less than $11m for pure venture capital backed fintechs.

Overall, BCG experts reckons that banks who do move quickly and efficiently should prosper.

“By establishing labs to focus on early-stage, novel technologies that are core to their principle activities, and by systematically pursuing adjacencies that have synergies with their existing portfolios, investment banks can position their business for a bright, digital future.”

Blockchain-based solutions

Although blockchain prototypes exist, BCG’s consultants says there is minimal traction within the industry due to the relative immaturity of the technology.

Of all the tech clusters, blockchain-based fintechs have experienced the by far the highest compound annual growth rate over the past three years.

Yet disclosed funding for such projects is still significantly behind other areas of innovation, such as data and analytics.

“Cross-industry settlement of billions of daily trades between globally dispersed counterparties, although theoretically feasible by blockchains, represents one of the toughest use cases for a technology still in its infancy.

“Automation of more simple processes, such as recording client data on decentralized ledgers, for KYC and anti-money laundering purposes, is likely to emerge first.