The next wave of fintech disruption

The bank has traditionally sat in the center of the broader financial world.  The post-crisis challenges have allowed fintech firms to capture market share in traditional banking endeavours such as payments, lending, investments, and financial planning. First wave fintech disruptors with no asset base or legacy banking infrastructure have made significant inroads into challenging banks in their core businesses. Banks have reacted in a variety of ways to these challenges with disparate degrees of success, but only those actively partnering with and supporting fintech innovators have gained a competitive edge.

Similarly, exchanges have stood at the centre of the capital markets for much of human history. The years of connectivity, combined with the earth-shaking changes in the ability of firms to access capital and a global regulatory model that has focused on risk mitigation, have created an ideal world for next wave disruptors to bring solutions to complex trading, liquidity, regulatory, and operational problems that have been difficult for incumbent firms to solve on their own. This investment is going toward blockchain, RegTech, AI and other tools for driving change in the capital markets.

As it has happened with banks, those market infrastructure providers that decide to embrace, leverage and coexist with upcoming fintech firms will be able to further their historical strengths and stay at the core of financial markets.

Since 2008, capital flow into fintech investments has grown sixfold. Last year, about $19 billion in capital was invested in fintech across approximately 1,200 deals, nearly doubling funding flows in 2014. We have seen banks partnering with fintech, filling gaps and bringing critical experience and enterprise scale to these endeavours. Major parts of the financial services ecosystem run the risk of being transformed by pioneering financial technology firms. At the same time, strategic firms have developed innovation centers of excellence, laboratories, and their own CVC funding vehicles to invest and guide in areas of core interest to these firms. CVCs now represent 25% of global fintech capital flows.

This week the Deutsche Bourse announced the creation of its CVC DB1 to fund innovativation in the capital markets. Celent, on behalf of Deutsche Bourse, explores this next wave of fintech in the capital markets and highlights the power of future collaboration between leading financial infrastructure players and fintech firms.

Future of Fintech in the Capital Markets can be downloaded from the DB1 Ventures website. I look forward to your comments.

The rise of private capital, disintermediation, and the advice premium

private capital Five observations and a final takeaway from my latest report, Private Capital on the Rise: The UHNW, Private Securities, and the Hunt for Non-Correlated Assets.
  1. The digital revolution, the requirements of a behaviorally distinct Millennial generation of investors, and the bloating of the IPO market post crisis have driven enthusiasm for non-bank or alternative sources of capital, with private equity (and venture capital) funds at the fore.
  2. Recently, direct investment (i.e. the deployment of private capital into closely held companies) has emerged as an intriguing alternative to private equity, particularly among family offices.
  3. As per the figure above, direct investment represents the “fat middle” of the traditional funding hierarchy. It assumes the disintermediation of the private equity fund manager, and is more discreet and flexible than equity crowdfunding, which has a distinctly retail orientation.
  4. On the down side, accounting system limitations make it difficult to value and account for private holdings in any scalable way. The inability to capture pricing and position information on a regular basis presents risks and opportunity costs for the direct investor.
  5. The good news is that technology vendors are developing systems to track and reflect percentages, cash outlays, and other categories relevant to private capital investment, as opposed to systems that view the world solely through the lens of unitary shares.
To point 5 above, a takeaway: While next-generation technology will be instrumental to success in the short term, portfolio management systems with the firepower to support the market for private securities will eventually be the rule. A more level technology playing field means that competitive advantage will come less from tools or even capital and more from insight and intellectual reach. The advisor able to provide these will be able to command a premium.