Capital markets infrastructure providers (CMIPs)—the platforms, pipes, and plumbing of global finance—have been strong performers in recent years despite a challenging environment for capital markets and investment banking overall. CMIPs, which include trading platforms, interdealer brokers, clearing houses, information services and technology providers, securities depositories, and servicing firms, posted 3 percent average annual revenue growth from 2010 to 2015. Moreover, their future looks bright, with projected average annual revenue growth of 5 percent through 2020, outperforming both the buy side and sell side, which are expected to increase revenues by 3 percent and 1 percent annually, respectively, over the same period. These findings are discussed in our new report, Capital markets infrastructure: An industry reinventing itself, which says the strong outlook for CMIPs is driven both by favorable market dynamics and by expansion into new service lines.
Among the market forces fueling the growth of CMIPs are rising demand for their services, increased scale, and more electronic trading. In addition, as the sell side has been hit with heavier capital and cost burdens, infrastructure providers have stepped in to offer more services and develop new relationships. The performance of the CMIP industry varies across both regions and sectors. Asia–Pacific posted 6 percent average annual gains in revenue from 2010 to 2015, while the United States recorded a 3 percent increase annually, and Europe, Middle East, and Africa saw just 1 percent growth annually. Among sectors, information and analytics services, technology infrastructure, and securities services saw accelerating expansion from 2010 to 2015, while trading (excluding Asia) and custody and settlement lagged. Clearing saw big gains in the Americas, following the introduction of mandatory clearing of over-the-counter derivatives.
McKinsey sees five key trends affecting CMIPs over the next five years:
- Diversification into adjacent businesses. A number of firms have already diversified into alternative capital markets infrastructure businesses, helping the top 15 providers take a 41 percent share of revenues in 2015, compared with 35 percent in 2010. Larger firms are also expanding into post-trade and information and technology services.
- The rise of the buy side. CMIPs are expanding services to the buy side (where revenues are growing strongly), while maintaining solid relationships with their sell-side client base. In 2015, the buy side accounted for 38 percent of global capital markets ecosystem revenues, compared with 30 percent five years earlier. CMIPs offer direct access in execution and clearing to the buy side, alongside a range of pre- and post-trade services. CMIPs are also in a strong position to leverage the rising popularity of exchange-traded funds, either through listings or data services.
- Increasing demand for data and analytics. New technologies have created a revolution in the use of data and analytics, generating new products, greater efficiency, and higher margins. Data is increasingly “a golden resource” for CMIPs, and analytical tools that leverage data are set to create revenue opportunities across business models, asset classes, products, and services.
- The rise of fintechs. CMIPs can leverage partnerships with fintechs to boost efficiency, drive innovation, and fuel growth. In the corporate and investment banking space, enabling higher levels of efficiency, rather than disruption or owning the client relationship, is the focus of 67 percent of fintech investment. As the sell side withdraws from some capital-intensive activities and legacy systems become obsolete, CMIPs and fintechs are stepping in and sometimes collaborating to create efficiencies and improve customer services.
- Utilities as core service offerings. Financial-services firms increasingly recognize the benefits of sharing services that lack a unique value proposition. The cost efficiencies and risk mutualization offered by utilities are antidotes to the increased capital and operational costs arising from regulation, suggesting they are set to become a permanent feature of the landscape. Utilities deliver cost and efficiency benefits and can help catalyze technology upgrades. To capitalize on their opportunity to establish industry utilities, CMIPs must become technology leaders and reach sufficient scale to guarantee cost and service quality advantages.
In order to take advantage of the growth opportunities generated by these trends, CMIPs will need to leverage their strong financial positions to step up services and tap new revenue streams, either through targeted mergers and acquisitions or the introduction of new products and services. Their strategic initiatives should address eight key areas:
- Strengthen their core business
- Focus on new and fast-growing asset classes, such as corporate bonds
- Capitalize on data and analytics to create new intellectual property
- Provide integrated compliance and risk management solutions, to help clients meet their regulatory obligations
- Create industry utilities for processes that aren’t differentiated, for example, client on-boarding
- Expand service offerings for corporations in capital markets, for instance, pre-IPO advisory and investor relations services
- Expand into new geographies through partnerships and new distribution networks
- Establish an e-commerce trading ecosystem