Fintechs and tech giants set to disrupt capital markets infrastructure sector

Written by David Adams

Senior managers at capital markets infrastructure providers (CMIPs) such as exchanges and counterparty clearing houses (CCPs) believe that both fintech, in its various forms, and the technology giants could create significant disruption in the capital market infrastructure (CMI) sector in the near future.

Research from the World Federation of Exchanges (WFE) and McKinsey highlights the growth in fintech activity in this part of the financial services sector, which has grown by 277 per cent over the past decade, faster than fintech activity in corporate banking or payments. But it also shows that more WFE members believe large technology companies will have a major impact in this sector than those who expect incumbent companies or fintech start-ups (fintechs) to have the biggest impact.

The WFE members picked out five areas where fintechs were contributing to innovation, usually in partnership with incumbent CMIPs: access to capital, trade execution, post-trade services, data analytics and other information services; and operations. The WFE members’ most important priority was post-trade services, but there is more fintech activity underway in the access to capital area. The latter area is where fintech start-ups appear to pose the greatest threat to incumbents, rather than offering potential for mutually beneficial partnerships.

Respondents picked out distributed ledger technologies, including blockchain, as the technology type they felt had the greatest potential, but their responses also highlighted the potential for AI, automation and quantum computing to have a significant impact in this space, alongside the risk management and reporting technologies that are now often referred to as regtech.

41 per cent of respondents said they thought that large technology companies like Google, Microsoft and Amazon could have the greatest impact in the CMI sector over the next five years, compared to 39 per cent who expected incumbent CMIPs to do so. Only 20 per cent thought the most disruption would be caused by fintech start-ups.

The report, entitled Fintech decoded: the capital markets infrastructure opportunity, outlines three strategic priorities for CMIPs: protect the core business, modernise existing business processes and operations; and seek to capture new opportunities through use of fintech.

“It is essential to CMIPs to understand that fintech is a means to a strategic end and not a strategy in itself,” said Matthias Voelkel, a partner at McKinsey and a co-author of the report. “We have identified roughly 700 CMI-related fintechs at various stages of development and activity across the capital markets infrastructure value chain – incumbents, therefore, need to focus.”