FundTech – What are the most effective means, via partnerships or accelerators or incubators for some of these start-ups to be successful?
Zubairi – We will increasingly see start-ups partnering with each other to provide holistic solutions where it’s sensible that they address adjacent and related parts of the value chain, so that they can go to incumbents and stakeholders in the market and say, ‘This plus this is a solution for all of this and it all integrates seamlessly.’ The traditional banking sector is slightly more advanced in that there are platforms now that combine access to a plethora of different solution providers and provide a one-stop shop for integration. A lot of that has been accelerated through regulatory reform, specifically with the second Payment Services Directive (PSD2) in the traditional finance area, which means that any client can advocate for any particular provider to give them access to their payment information and bank accounts. We’re not really seeing that so much in asset management as yet, but that’s because I think we’re at a bit of an earlier stage in the asset management industry.
Ultimately the big boys in this game have the means to do this themselves. Where fintechs can add value is further down the value chain to the small and medium-sized firms. They don’t have the resources to integrate all these different components, but they would look at third-party platforms that can act as an aggregator for a variety of different types of solutions. Ultimately Bloomberg does this in some ways. But then you are limiting yourself in terms of choice and optionality because you’re relying on a third party to make system selections on your behalf. I think we’ll see both types of solutions, be it highly individualised and also aggregation platforms being successful within the market.
Vinden – The real problem that asset management is facing at the moment is how to reduce its costs and grow AuM, and unless a fintech can clearly demonstrate how it’s going to do that, they will continue to struggle to really make inroads. There are real problems and it is much harder going than I think any of us thought when we kicked it off, but I’m still optimistic for the future.
FundTech – We’ve seen the use of APIs in the payments space, helped by PSD2, to build so-called ecosystems. Is this the logical way for some of these very specific start-ups to be more relevant to the funds industry and are we seeing this in practice?
Hale – I’m seeing that in TrustQuay’s space of corporate service, offshore trust and alternative fund administration. It is not possible to find a single solution from one vendor that can meet every need, but if you’ve got a core vendor that can then plug in other market-leading products and services, from specialist providers through APIs, then you get the best of both worlds – the more modern, latest ecosystem component or service, combined with a core platform that covers the client’s core needs.
Zubairi – The ecosystem approach does have its merits, and one way some have tried to do that is advocating managed services solutions, which have, unfortunately, never really taken off on a massive scale. The reason why some of these initiatives fail and why we still see these very niche solitary solutions is ultimately because of the complexity of the legacy infrastructure that the larger players currently have. It’s like a bowl of spaghetti sometimes at the back end, and so if you do provide a platform-based solution incorporating a multitude of different niche products, it still has to be contained within a particular area. You can try to couple digital signatures with the KYC process and maybe add automated translation services and plug that all into your document-management process to try and solve one part of the jigsaw. But if you try and do anything more holistic, you have to work out where to plug it in. That in itself could be the biggest nightmare. There is still a lot of merit in trying to solve the 1,000-piece jigsaw by starting with a little corner and then another corner and then filling in the sides and filling in the rest, rather than dumping all the pieces and hope that all the jigsaw will sort itself out.
Belding – The use of APIs is much more widespread now and we have APIs that allow you to check on the status of your trades and give you other powerful capabilities. But we are still integrating people into our network that are using CSVs and legacy technology. The systems are often completely unautomated and can be difficult for businesses to upgrade and adjust. Often there is no one left in their organisation that can operate the system effectively, or a vendor will charge huge amounts to address any issues. So the business case starts to drain away and firms decide they don’t want to do anything after all. This is all a huge blocker to the use of APIs or smaller scale.
Zubairi – Another major barrier to general and agile innovation in the industry is consolidation and the power that administrators and custodians have. For example, we know a very large P2P lender that has created a successful retail investor fund wrapper. It wants to do digital onboarding but none of the fund administrators can cope with that, so the fintech is forced to back up and be less innovative. As mentioned previously, these institutions have tremendous power in the value chain of asset management and their level of innovation can essentially direct and control the level of innovation across the sector as a whole.
But the potential offered by blockchain around tokenisation and access to new asset classes and digital currencies is only going to gather more momentum. Not all custodians can deal with digital assets and in the US, Fidelity got so frustrated it launched its own digital custodian. So that should be a warning to all service providers that if you are not keeping pace, clients will look elsewhere.
My worry is that Europe is falling behind the US and Asia because so many of the key players in the funds market are banks and European banks are suffering. Blockchain disruption is coming if they players don’t embrace the change and provide appropriate services. The pressure is mounting.