The Rise of Fintech
Innovation and regulation have redefined financial technology.
Although the roots of modern financial technology stretch back to the introduction of time-sharing mainframes several decades ago, Wall Street has seen a dramatic fintech revolution in the past ten years.
Technological advancements coupled with after effects of the 2008 credit crisis have enabled new entrepreneurs to create new products and services faster and less expensively than in 2007.
Sam Gaer, the founder of five-year-old hedge fund Katana Financial as well as former New York Mercantile Exchange and FINRA CIO, noted the stark difference between what financial firms, exchanges, and vendors can accomplish today compared to the closing days of the George W. Bush Administration
“Ten years ago the infrastructure that we’ve built on AWS would have taken weeks or months to procure and install, not to mention the huge differential in fixed capital costs and installation, maintenance, and bandwidth,” he said. “Today, we can deploy a server or database to our specifications in minutes. I’ve been an AWS user since 2011 and immediately recognized that it had the potential to disrupt the way people develop, deploy and distribute software.”
Gaer attributes much of fintech’s evolution to the vast amount of new market regulations regulators brought out in the wake of the global credit meltdown.
The only way to provide regulators with the massive amount of data they started to request was through automation that, in turn, has let firms scale their businesses by leveraging the latest fintech advancements, he told Markets Media.
The growth of regulatory oversight also had the knock-on effect of changing who is bringing innovative fintech to market.
“There has been a significant lessening of in-house technology development by the capital markets community due to the near decade of regulatory compliance costs,” said Terry Roche, principal, head of business development and fintech research at Tabb Group. “But the fintech offerings are coming from a much broader set of service providers and those new offerings are substantially challenging existing in-house architecture and workflow concepts.”
Whereas the larger and more established fintech vendors or the banks themselves would have acquired the innovative fintech startups in the past, there is more venture capital and private equity funding available to fintech startups today, he added.
One of the greatest leaps forward for Wall Street, as well as other industry verticals, has been the development and adoption of cloud computing and other hosted infrastructure services.
In 2007, capital market firms could co-locate their technology in someone else’s data center or take advantage of hosted services, but the moniker “cloud” did not exist yet, according to Roche.
“What the capital markets were doing at the time was harnessing computing through grid regimes or high-performance computing farms that were somewhat distant cousins to what cloud has become and is evolving to,” he added.
Before the advent of Amazon’s cloud service and subsequent of similar service like Microsoft Azure, entrepreneurs had two choices, according to Gaer.
“They could spend a lot of money on people, equipment, and data center space, or hope that they had a relationship with a larger bank or institution that already had this kind of infrastructure,” he said. “Either way, you would be placing a good deal of your budget into large and relatively fixed assets. The implications on your balance sheet as well as your lack of ability to quickly change that infrastructure would ultimately slow you down in terms of development and delivery of your product.”
The compression of computing cost has not only allowed firms to develop, sandbox, test, and deploy new applications; it has permitted fintech providers to focus on differentiating their offerings to a much higher degree.
“Fintech has been around in one shape or form since the 70s and 80s, and for most of that time front ends seemed stuck there,” said Peter Maragos, CEO of Dash Financial Technologies. “It’s only been over the last few years that sleek, web-based interfaces the users have grown accustomed to on their consumer apps and devices have been emulated in their institutional platforms, which makes a huge difference regarding usability and overall satisfaction.”
It is almost impossible to overstate the degree to which fintech advancements have helped the institutional investors, he added. “Markets have never been more efficient, and that largely is because new technologies and entrants have either replaced legacy intermediaries, who added unnecessary friction cost or forced those intermediaries to adapt themselves.”
Focus is on firms that develop and commercialize digital innovations in finance.
Innovation in data analytics is as important as advances in trading technologies.
Common standards, akin to the FIX protocol, are indicated as a next stop for the industry.
The Commission wants Europe to become a global hub for fintech.
Machine learning is permanently reshaping capital markets.