March 6, 2017

FinTech – a game changer?


Will the emergence of the Fintech Industry and the subsequent disruption really change the world of Finance? Part 2 – Reactions from the Finance Sector

This is the second of a series of 3 articles about Fintech written by Torsten Miland, Managing Partner AIMS Denmark, Global Head of Financial and Professional Services Practice of AIMS International (click here for part 1)

And the problem for the traditional banks?
When innovating within the traditional banking sector, these institutions are faced with a number of compliance issues and changes in their legacy-systems. This means that innovation is sometimes slow and even being halted.

Also compliance with legal issues can hinder banks from delivering easy access apps for services. Governments have a natural tendency to regulate banks and other financial institutions, but at the same time the governmental bodies that oversee this area do not always have the insight and competencies to regulate FinTechs.

FinTechs do not have these problems. If they have an idea, it can normally be developed very fast, the platform can be available within a short timeframe and the clients are fast adopters. They are also very much under the radar for two reasons; one is that they can establish themselves in off-shore climates with little regulation and the other is lack of insight from government.

So how are the large banking institutions reacting to this?
We are seeing a move toward large, old financial institutions gaining knowledge about FinTech and also acquiring smaller start-ups that have proved that they can gain momentum within a financial field.

Inside the financial institutions we also see that the IT-departments are developing their own services and apps geared towards the same market as FinTechs.

Fortunately, the large banking institutions are not stupid. So the reaction from them will be coming and with even greater force than we have already seen.

An industry expert explains
Andrew Saks-McLeod from FinanceFeeds.com explains:

 FinTech has become not only an integral part of the entire electronic financial services business, but is actually now leading the entire industry forward.

The electronic trading business, whether institutional or retail, has a number of key components which range from the Tier 1 banks which provide direct top level liquidity, through to the prime brokerages which aggregate the price feeds using very sophisticated systems, to the liquidity management and integration companies, trade clearing firms and then down to the platform providers.

At user-level, there are further important components, including signal providers, automated trading and algo developers, copy trading companies and payment processing firms, as well as regulatory technology companies that automate the reporting process.

This industry is heading towards where the futures industry was going approximately 10-15 years ago, which is into managed products. Don’t get me wrong, dumb flow will still be there (big margins) but the serious money is looking at FX as a serious alternative asset class and moving into managed products. I see the industry as squeezing margins tighter moving forward.

Managed funds and investment funds are another factor. These will be actively managed (frequently traded) and passively managed (macro-economic; taking long term- low leveraged positions). Long term strategies like ETFs in the stock world.

I believe the large money will be here, and there will be not so much in the retail traded scene in the future.”

Next week we will publish the last article in this 3 part series of articles. Read about regulatory issues and how there are being addressed by FinTechs.

 

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