Fintech in capital markets - The road ahead
- by Varun Narang and Naveen PV
Capital markets have always been pioneers in adopting innovative ways to carry out business. However, more recently, the industry has been busy dealing with cost pressures and a shifting regulatory and compliance landscape. Meanwhile, increasing customer expectations, a surge in big data, information security threats and technology-driven disruptions have been pushing the walls, making the capital market sector more complex than ever.
In these challenging times, the rise of Fintechs has introduced much required flare of innovation to the sector. It has also expanded the horizon for the capital market world by providing more choices to companies and investors. Fintechs have already started making their presence felt in various segments of the industry by offering technology-based capabilities in areas such as trading (including social trading and zero brokerage platforms) and digital advisory. A few noticeable examples are 'eToro', an online social trading tool with social investments network and 'Robinhood', a US-based stock broker that allows individuals to invest in publicly traded companies and ETFs listed on US exchanges without paying a commission. Further, Fintech robo-advisors like 'Betterment' and 'Wealthfront' are growing at a rapid pace.
Off late, many leading players from the sector have shown a keen interest in the Fintech space by launching accelerators and conducting pilot tests in collaboration with Fintechs. Some capital market firms are experimenting with blockchain technology, which they believe could streamline clearing and settlement processes. UBS is building a blockchain-based trade finance system, Goldman Sachs has filed a patent for a cryptographic currency technology, aiming for a faster, cheaper and safer settlement process when trading and clearing transaction, and, RBS has been testing a 'clearing and settlement mechanism' based on the Ethereum-distributed ledgers and smart contract platforms.
Leveraging technological advancements and lower barriers to entry, some Fintech firms have almost reached the doorstep of larger traditional firms by focusing on business capabilities along with technology innovation. Capital markets firms are also aware of this dual role which Fintechs are capable of playing in their business environment. One, as a collaborative partner, helping existing players in the sector grow their business and bring efficiency to traditional processes and practices and two, as tough competitors, who can feed into the market share of the incumbents. Hence, there are some inhibitions on the part of traditional players when engaging with Fintechs.
Data security issues and regulatory hurdles are also acting as speed breakers in the collaborative transformation journey of Fintechs and capital market firms. Market regulators have already expressed their concerns on the rapid development of Fintechs, which may pose new challenges in managing risks and ensuring adequate investor safeguards.
However, as it stands today, Fintechs are poised to become real game-changers for global capital markets by brining greater agility, efficiency and transparency. With the Fintech trend catching up, the outlook of the capital markets sector looks promising, with robust capital market infrastructure, streamlined processes and stronger data security.
Overall, it is good news for investors as Fintech companies will enable more investors to access financial products and services at an affordable cost, and for companies too as Fintechs will help them gain access to capital in a much easier and transparent way. It also presents a big opportunity for technology providers as it gives them leeway to implement more innovative solutions and collaborate with Fintechs.