Fintech decoded: The capital markets infrastructure opportunity

Fintech decoded: The capital markets infrastructure opportunity

By Siobhan Cleary, Markus Röhrig, Roger Rouhana, Christian Schaette, Nandini Sukumar, and Matthias Voelkel
Fintech decoded: The capital markets infrastructure opportunity

The level of investment in CMI fintech is gaining. For providers, the key is to view fintech not as a strategy in itself but as a means to reach strategic priorities.

Technology has long been the engine driving capital market efficiency—both for investors in the markets, and for the capital market infrastructure providers (CMIPs) that operate the exchanges and other trading venues, central counterparties, securities depositories, index providers, and data and analytics companies. More lately, fintechs are bringing new technologies to market even faster and with a greater impact. Hundreds of fintechs are focusing their development on capital market infrastructure (CMI), and while CMIPs recognize that fintech will have a significant influence on the industry, many remain unsure of which technologies to adopt and to what degree, and how best to engage and interact with fintech companies.

The role and importance of CMIPs in the markets has grown in the past decade—along with their revenues—owing to changes in the regulatory environment (for example, a push toward mandatory central counterparty clearing of over-the-counter derivatives or ever-increasing reporting requirements), in the investor landscape (for example, a higher profile for buy-side firms) and in customer behavior (for example, an increasing call for data and analytics solutions).

In the coming years, many CMIPs will seek to protect their businesses, and achieve even higher levels of efficiency, service provision, and growth, through innovation and adoption of new technologies, some of which may prove revolutionary. These technologies will come from current technology leaders that tailor their services to CMI applications, from firms’ internal development, and from the new generation of fintechs.

Although growth in fintech investment across the broader financial services sector has slowed since 2015 due to investor caution over a more uncertain macroeconomic environment, the growth trajectory of CMI fintech has remained steep, and likely has yet to reach a peak (Exhibit 1).

Fintech activity within capital markets infrastructure has grown by almost 300% since 2010.

We have identified four fintech themes shaping the CMI value chain. Some of these themes increase productivity and lower costs, while others generate new sources of revenue:

  • The use of advanced analytics and artificial intelligence is set for rapid growth, as the amount of available data circulating through capital markets grows, and amid increasing interest in the application of advanced analytics to market, financial, and economic data.
  • Distributed ledger technology is applied to a range of CMI operations. Use cases include clearing and settlement, alternatives to the traditional markets for access to capital (initial coin offerings), and new digital markets.
  • Fintechs will bring greater efficiency through innovative technologies such as cloud and quantum computing—for example, in the sphere of matching technologies—while driving depth in traded markets and expansion toward new asset classes.
  • Post-trade services will gain in productivity through the application of automation and robotics. A separate branch of regulatory tech firms will bring efficiency and uniformity to risk management and regulatory reporting.

To date, the fintechs most active in CMI are smaller start-ups.1 Most are developing products as components within the CMI industry, and appear to be mainly interested in working together with existing providers, rather than in poaching their customers. Still unclear, however, are the interests and intentions in CMI of the global tech giants, and whether they might venture into the core of the industry at scale. Given their great capital resources, deep data pools, and world-class analytic capabilities, their entry could significantly change the CMI landscape. Most CMIPs believe that it is either these tech giants or incumbents working with fintechs who have the greatest disruptive power (Exhibit 2).

Overall fintech financing has been slowing; CMI bucks the trend thanks to a few large funding rounds.

Respondents to a survey of the membership of the World Federation of Exchanges (WFE) were largely positive about the potential of fintechs, and were unanimous in expecting enhanced productivity or new revenues from incorporating their technologies in their businesses. None saw fintechs as a threat, but instead viewed them as potential partners and enablers of growth. They acknowledged, though, that the extent of the impact is difficult to ascertain.

CMIPs follow various routes to bringing fintech into their organizations. Some firms surveyed reported relying on more than one, depending on their view of the size and importance of the opportunity (Exhibit 3):

Collaboration and joint ventures are the favored models for fintech relationships.
  • Development of internal capabilities. Most of the survey participants have established one or more internal groups dedicated to studying the global fintech landscape. Only a few indicated they were aggressively developing new technologies themselves, as this is a resource-heavy approach.
  • Collaboration and joint ventures. Forty percent of the WFE members surveyed believe that collaboration is the most efficient approach to fintech, followed by joint ventures at 25 percent. The primary reason cited is a shortage of resources, inhibiting the development of their own solutions. Moreover, the speed of innovation is rapid, and diverse talents are needed for internal development.
  • Minority or majority financial investment. Of the 46 WFE members surveyed, 11 said they are investing in fintechs through minority stakes, while 10 said they use majority investments (multiple choices were allowed). Most innovations may fail, but one or two are likely to become success stories, WFE members said.
  • Outright acquisition. Just 9 percent of survey participants cited acquisition of fintechs as the most effective approach.

The fintech landscape is evolving at an accelerated pace, as new firms and innovations enter the market while others drop out, and ideas are rapidly developed and deployed. One approach to a successful CMIP fintech strategy calls for a “portfolio of initiatives”: incumbents invest in multiple fintechs of different sizes, time horizons, and objectives—some with a short-term focus aimed at enhancing the core business, and others with longer-term objectives based on a smaller number of revolutionary ideas. With so many fintechs in the market and more to come, a structured approach is essential to identify the technologies best suited to a CMIP’s strategy and operations. It is also important to determine which projects to develop internally or through reliance on fintechs, and what form the relationship and investment in fintechs should take.

The study that underpins this article and associated report was developed jointly by the World Federation of Exchanges and McKinsey.

Download Fintech decoded: Capturing the opportunity in capital markets infrastructure, the full report on which this article is based (PDF–4MB).

About the author(s)

Markus Röhrig is a partner in McKinsey’s Munich office; Roger Rouhana is an associate partner in the New York office; and Christian Schaette is a specialist in the Frankfurt office, where Matthias Voelkel is a partner. Siobhan Cleary is the head of research and public policy at the World Federation of Exchanges, where Nandini Sukumar is CEO.
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