As financial technology or ‘FinTech’ firms continue to grow in popularity, Alix Robertson looks at the obstacles that lie in the way of implementing new solutions and the rewards that can be found at the finish line.
Financial technology, or ‘FinTech’, is a burgeoning and varied industry. After the global financial crisis in 2008-09, priorities shifted drastically towards a greater focus on transparency and risk and compliance concerns.
The subsequent environment of strengthened regulatory oversight and ever-increasing amounts of data to consider has opened up new opportunities for FinTech firms. It also poses some challenges.
Otas Technology’s cloud-based platform sifts large amounts of data, providing traders and portfolio managers with information to help with investment decisions. Its head of product specialists, Simon Maughan, says regulation has been both a help and hindrance to the industry’s adoption of financial technology.
“Large institutions on both sides of the buy-side/sell-side divide have been more fearful of falling foul of the regulator and being subject to large fines than they have worried about the impact of slow growth,” he says.
Adapting to new regulations has sapped the budgets of many in the industry, but Maughan suggests that since regulatory changes are being implemented, firms may have more of their budgets freed up for “growth-orientated projects”.
Steve Young, chief executive officer of Citisoft, a consulting firm for the investment management industry, also sees regulation as a double-edged sword. He says that the overheads from regulation have been restrictive for most of Citisoft’s asset management clients and have prevented them from making dramatic technological overhauls.
Like Maughan, however, Young sees opportunities for new technology solutions in the area of regulation and reporting. “At the moment, we’re not seeing a great deal of smart technology to address that, and a lot of firms are looking to outsource.”
As meeting regulatory requirements becomes ‘business as usual’, he says there will be a drive towards improving efficiency and reducing costs, potentially leading asset managers to move back in-house and look for technology solutions to help them.
“As the regulation settles down and is better understood, then technology will naturally step up to step into that space... My sense is we’re on the cusp of change.”
PICK UP THE PACE
Though Maughan and Young are hopeful of exciting times ahead, barriers are slowing progress in some areas.
Young sees new regulation as a dividing line between regions as far as speed of adoption is concerned. “We’ve seen that North America is far more advanced in investing more strategically in technology in this space. In Europe and particularly in the UK, it’s still quite tactical, and primarily that is driven by regulation,” he says.
Maughan notes that in Asia, there is much more willingness to embrace change. A younger workforce operating in a rapidly evolving environment makes the region particularly fertile ground for FinTech firms.
Overall, though, the pace at which technology is being adopted does not match the pace of technological developments, he says. “Technology could be doing 10 times more than it does today. It’s held back by a lack of acceptance within the industry that what is being done is genuine progress and will genuinely improve performance. It is a slow build of adoption, based on familiarity.”
One factor that is causing some to drag their feet is the expense of replacing legacy systems.
At Fincad, a company that provides financial analytics software, capital markets strategist Matt Streeter says some asset managers have found the cost of implementing new technology to be “exorbitant”.
“Firms try to do things very efficiently now, and they do try to take more ownership of what they are building out in their institutions.
“The cost can be quite significant, especially when you look for an entire organisational overhaul,” he adds.
Carson Boneck, managing director of the investment management segment at financial information provider S&P Capital IQ, says because of this, it is important to make the value of the technology solution explicit.
“FinTech firms need to be able to express their value relative to their clients’ total cost of ownership,” he says. “We make a concerted effort to connect value to our client’s business whether that is in terms of the client identifying new investment ideas, deals or clients.”
Besides weighing implementation costs against long-term benefits, a further consideration is the burden of maintaining legacy systems. At Citisoft, Young says the drain from running outdated technology can be significantly underestimated.
“The inefficiencies of a lot of the technology out there mean that there’s a plethora of downstream processes going on, including checking and duplication of effort, because the technology is not up-to-date, and does not have the agility and flexibility that firms need today.”
TRANSPARENCY AND EFFICIENCY
If hurdles can be overcome, a number of clear benefits emerge from embracing FinTech solutions. More efficient, transparent processes come high up the list.
Rupert Vaughan Williams, co-founder of Comada, a company that provides technology solutions to the alternative funds industry, says providing straight-through processing is the only way to improve both efficiency and transparency.
“By using straight-through processing methodology you have the ability to reduce operational risk, increase efficiencies and importantly provide much needed transparency through accurate client reporting.”
He emphasises the significance of streamlined technology and strong communication, especially in the context of ‘big data’.
“It’s all about the data, and if you are holding data in a siloed environment and you’re having to re-input data, operational risk goes through the roof,” he says.
“Platforms need to integrate processes and those using them to leverage core data with the flexibility to connect to each other.”
Ouafa Ricaud, global business development manager, investment management, at financial services software company Misys, agrees. “In response to margin pressure and operational complexity, firms tend to consolidate multiple systems into one to manage their entire investment processes, achieving reduced operational risk, lower costs and a single version of the truth firm-wide.”
She adds that in responding to the current climate of economic uncertainty and increased regulation, transparency and flexibility have become some of the most important considerations for investment managers.
At Multifonds, a provider of fund and portfolio accounting and investor-servicing software, executive vice-president Keith Hale is also preoccupied with transparency, describing it as “very much a watchword” in the industry.
He sees a clear opportunity for FinTech companies to improve transparency by providing clients with access to clear, concise data, through services such as real-time portfolio information.
“If you talk to people on the sell side they would say, ‘And you don’t have that?’” he says.
“The technology is there, it’s a question of how you implement it and how you use that technology.”
At FinTech company Instinct Studios, investment information is a central focus. Founder Majid Shabir says that its recently launched Fund Explorer service offers easily accessible information provided in real time. “It’s all about making sense of financial data any time, anywhere, on any device.”
Fund Explorer is a digital alternative to the fund factsheet, designed to improve investment transparency and help customers make informed decisions about their finances.
The service, which enables customers to view and interact with their investments in real time, came in response to in-house research that found many fund factsheets contained performance data that was around a month and a half out of date.
“Consumers want to know more about investments and people are becoming more conscious about their financial future,” Shabir says. “We hope this will become the industry standard in terms of how investment information is given context and consumer understanding is enhanced.”
Henry Cobbe, managing director of product developer Elston Consulting, which develops technology solutions for asset managers and intermediary firms, also stresses the potential for FinTech to bridge the gap between fund managers and their clients.
“Fund managers now have to create funds that provide answers to clients’questions, and they’ve also got to learn how to speak to their customers.”
He reiterates the focus on streamlining products and providing clear information to empower users: “The user interface we’ve been designing employs behavioural insights to make it easier to navigate investments.
“It’s really about the language, the design, the number of steps, the sign posting, the confidence-building that happens in that investment journey.”
Although there are obstacles to work around on the road to embracing FinTech solutions, there are many providers out there who understand the challenges and are ready to help firms along the way. As Cobbe says: “We’re designing all the steps, but it’s up to our clients to decide if they want to go on that journey.”
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