FundTech – Does the fact that the funds industry is more institutional than retail and less front-end focused make it less attractive to fintechs?
Belding – I think it does. The fund industry is a bit quirky compared to, say, retail banking. It’s harder to understand and there’s a smaller pool of people with the knowledge to actually start a fintech in the first place. If you have a new asset management platform as your fintech’s offering, it’s a big sell because you are asking somebody to replatform. Even if you tell them they will pay 20% less than they currently do. Your biggest competitor is the risk aversion and inertia.
Nasir Zubairi, Luxembourg House of Financial Technology – It’s about where in the value chain the start-up is targeting. Ultimately the large institutions and traditional banks control the value chain, particularly through custody and administration of assets, and there are traditional barriers there to innovation, though they are changing in attitude and this will help drive broad innovation in the sector as a whole. We are also seeing increased use of centralised management companies (ManCos) by smaller asset managers that lead to the outsourcing of a lot of functions. ManCos have the scale and capability to drive efficiency, and the lower they can drive down their own cost, the better their margins and the more competitive they can be to their clients.
The whole industry is under immense pressure from the cost of regulation as well as facing income pressures resulting in a massive profitability squeeze. The only way to manage that is to find new ways to make money or lower costs. Technology must be the driver of that business change. There is no other way. What we’ve seen traditionally is that it takes too long to translate concepts into actual implementations. But Covid-19 has been interesting in that it has shown firms that it is possible to transform their business in a matter of weeks, it has shown them they are not the slow-moving dinosaurs they had conceived. Now they have to continue that same agility in transforming their technology to ensure future competitiveness.
Hampshire – That’s such a good point. If you compare our industry to banking, their relationship with fintechs is more likely to be based on the front end – it’s apps and client engagement because front-end service is a big part of differentiating an offering for a bank and fintech start-ups are unlikely to be in a position to offer banks an alternative to large back-office processing systems. In our industry, whilst client service is important, of course, it is largely about performance. No one is going to give you their money for too long if your tech is awesome but your numbers are through the floor. As such, you have to focus on the big things that can move the dial. If a fintech can do my AML or my KYC, that could save me at best, perhaps one person a year and so it’s only interesting to a point. But if they say they could automate and digitise my fund administration, that would be a game-changer as it would deliver material savings to us and our clients. It’s very hard to do because of the complexity and the scale of it, but that is the sort of areas in which I would encourage start-ups to focus because that is where technology has a big role to play.
Zubairi – One key issue for the traditional industry is its culture and the form of personal incentives. Everyone’s sitting pretty in their role as CEO or as decision-maker thinking, ‘I’m not going to rock the boat because I don’t want to jeopardise the half-a-buck I’m taking home every year.’ I used to go along and speak with these guys and say, ‘Let’s do something,’ and they say, ‘No, no, we’re fine as we are.’ Then they lose their jobs or something changes and they find themselves looking for something else to do, and so many of them walked through my door saying, ‘I want to do something digital now.’ Why didn’t you come to me when you had the means and capital to do something? That is happening throughout our industry and it’s frustrating.
FundTech – In which areas will fintechs have most success?
Vinden – Every quarter, we issue a fintech mindmap, which has all of the fintechs that we’ve met over the last few years and how we think they fit into the industry, and they’re broken up by the big pillars that we would expect to see in an asset or wealth manager – an investments section, an operations section, a distribution section, a regtech section, and the investment section is the biggest section by far. There has been an explosion of fintechs targeting that sector and lots of new products claiming to revolutionise the investment research process or the investment execution process. There are some really interesting products there, but there are areas such as distribution and operations that are in much greater need of innovation, although they are big problems to solve. And then there is regtech, a good area for fintechs because it is standalone. Some of the new transaction reporting regtechs have been well adopted by asset and wealth managers.
FundTech – Do these tools require developers to have a background in asset management as opposed to coming from outside and bringing that approach to the funds industry?
Vinden – Yes, they really do. The funds industry is incredibly arcane and complex and it does require specialist knowledge. We often talk about books of record – you’ve got your investment book of record and your traded book of record and your performance book of record and then your TA book of record and your client book of record. Each one gives a slightly different view of the same data and they are all protected by the incumbents that have some piece of the value chain. That is where I’d like to see some real innovation, but it is very hard for individual firms to change that.
Hampshire – The first thing we look for is a clear use case or a clear business case/clear return. The challenge is getting away from these point solutions. No COO wakes up saying, ‘I want to manage 30 disparate systems and try and extract data from all of them to get some basic reporting across my firm.’ The utopia is always getting to one system, and that’s the challenge with these point solutions – to coordinate among themselves and present joined-up solutions to fund managers.
Vinden – A big goal for our industry is to come up with standards for how we connect these different systems and make it much easier to integrate systems and switch out systems or products if they didn’t quite work for you.
Hale – It is key for fintechs to find and focus on a specific niche to be successful. When I personally invest, for example, I look for the key business focus areas that the industry is looking to solve rather than generic tools or technology that could be used for anything in any market.
Hampshire – I don’t want someone to tell me what technology they’re going to give me, I want someone to tell me what that means for our income or my cost base or our fund internal rate of returns or total expense ratios. It’s easier then to see how that adds value.
Belding – A number of people will talk vaguely about some sexy new technology but won’t talk about the use case. It is amazing how far into the conversation you get before they tell you what it is actually going to do. I’ve even seen projects kick off when there is still not a business case there. It’s got to be something that clearly has a business case and is providing value that people can relate to and understand.