Within the broader financial world, it is increasingly apparent that change is afoot — new platforms, new technologies and (perhaps most significantly) new relationships are now coming to define the future of an industry that is at a crossroads. That crossroads is simple: after decades of developing internalized processes and ways of doing business, major players can either embrace transformative processes or risk being passed over by a wave of change and innovation.
Increasingly, the agents of this wave of change are fintech start-ups bringing digital technology to the larger financial world. “Silicon Valley is coming,” says Jamie Dimon, CEO of JPMorgan Chase. “There are hundreds of start-ups with a lot of brains and money working on various alternatives to traditional banking.” The stats bear him out — in 2015, over $19 billion was invested in the fintech industry.
Many insiders are predicting an “Uber moment” in the financial world. The possibility of this Uber moment is the crux of the crossroads, and thus the decisions, facing the financial market — will the future pass them by, or will they be able to embrace it? In the transportation world, the Uber moment has been (among other things) a bitter fight. Can the banking world transition without resistance to innovation, setting itself for future success?
The investment banking market has been particularly slow to adapt to the new realities of the digital world — a fact which creates a wealth of potential for fintech companies looking to innovate within that space. According to a 2013 Greenwhich Associates study, more than half of all primary bond trades (by volume) take place over the phone, and according to an Ontario Securities Commission report on the Canadian fixed income market in 2014, “this has hindered the growth of electronic trading platforms and made it more difficult to disseminate information.”
Fintech platforms like Overbond focus on providing new digital services, bringing fintech innovation, in this case, to the fixed income market. Services that among other things focus on market analytics, pricing and relationship management promise to help everybody involved in the process.
In 2015, a report by McKinsey and Co. called large bank losses to fintechs “little more than a rounding error.” This is quickly changing, as EY report from January 2016 claimed that the adoption rates of fintech platforms could triple in a year. As a result, established banks are considering ways to partner with younger incumbents in mutually beneficial ways. “In some cases, this may mean dedicating internal resources and partnering with start-ups and universities” said Joseph Hooley, chairman and CEO of State Street Corp., in the column ‘Adapt of Die’ in the April 2016, Institutional Investor.
This is all not to say that fintech companies have an easy path to success. In Canada, at least, fintech penetration has been low — only 8.2 per cent of Canadians reported using more than one fintech products in the past six months, according to EY. And as of yet, investment in fintechs geared towards the investment banking market has been low, comprising only 4 per cent of all fintech investment — primarily because consumer-facing platforms are “faster and easier,” according to Greg Baxter, Citibank’s Global Head of Digital Strategy, who also noted that platforms that are aimed at workflow processes (like primary bond issuance) are “clearly accelerating now.”
For the investment banking industry, the potential rewards of embracing digital innovation are hefty. Within the primary bond origination market in Canada alone, over 250,000 hours is spent every year performing manual tasks in service of legacy processes — phone calls, emails, and individualized files. Platforms like Overbond and others offer myriad improvements. But innovation does not stop there, digitizing current processes is just the beginning, real power of networks, or so called ‘network effect’ would be a secondary benefit, and arguably more impactful. Benefit of having insights into real time market behaviour by virtue of instantaneous digital footprint of all its participants.
The future is digital. It’s transparent. And it’s innovative. An Uber moment looming – presenting an opportunity for rapid innovation adoption through industry partnerships.
About Vuk Magdelinic:
Before founding Overbond, Vuk’s career spans over 10 years in capital markets and technology. As PwC Risk and Regulatory consulting manager Vuk led large digital transformation programs at Deutsche Bank and BNY Mellon in New York City. Prior to that he worked at CIBC Fixed Income trading floor in Toronto in structured products origination capacity. Vuk has collaborated on numerous publications addressing key trends in fintech innovation. Vuk holds electrical engineering degree from University of Toronto, MBA from Ivey school of business and is an avid abstract painter.