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Disrupting Investment Banking

How tech startups should be looking at banking disruption

17Jun

A recent Business Insider (BI) article labeled Goldman Sachs as a Tech Company, reasoning that it has 9,000 more engineers and programmers than Facebook, Twitter or LinkedIn. BI was joined by TechCrunch, who used it as a jump-off to bemoan the lack of startups developing technology for trading and markets in comparison to those looking at consumer finance.

A lot of companies like to brand themselves as Tech these days purely because they use a lot of technology. Which is a bit like a gardener calling themselves a metal company because they use a lot of spades. TechCrunch, Silicon Valley’s Pravda, has a clear motivation for bringing as many companies under the Tech umbrella as possible, although whether Goldman Sachs would go so far as to call themselves a Tech company is dubious. However, is TechCrunch wrong to suggest that startups are missing out on opportunities to develop technology in areas of banking other than retail?

Techcrunch’s article focused primarily on financial traders’ need for fast data. Financial traders already get their data pretty fast, although it is true that every millisecond counts and it could always be faster. TechCrunch noted too the potential value of social media analytics as a means of measuring market sentiment. Companies innovating in these areas could certainly see opportunities arise.

Increases in processing power and bandwidth also mean that information is now far more plentiful, and the proprietary access that big investment banks have wielded is no longer the advantage it once was. Clients are now able to access much the same data as the dealers, especially prices. This is causing a sea-change in the competitive landscape, one that large investment banks are not being as quick to adapt to as they might, leaving gaps for attackers.

Large asset managers are increasingly looking to make sure corporations are issuing the securities they want to invest in, instead of just the securities that banks want to structure. In Securities deal terms and conditions, these have long been logged and registered with third-party providers, and nonbank entities are getting hold of these data assets to gain leverage in the origination market. In stock lending, there has been no centralized marketplace where borrowers can see pricing information. This is already an area where certain disruptors are attempting to move in.

Many investment banks also have multiple trading platforms, which still require unification. Most large investment banks’ clients use multiple products and sales channels. Some investment banks outside the top five, including UBS among others, have already struck deals with firms for standardized solutions to replace their many platforms.

There are a number of things that investment banking should be doing to greater exploit technology, but serious problems in the industry such as regulatory issues and litigation, as well as the challenges of moving from legacy systems, have greatly slowed them down. Banks have subsequently fallen behind other industries in their adoption of technology.

As new entrants to the market exploit technology, the need for a large balance sheet is dropping, and any area that is slow to adopt technology is likely to see hungry and nimble technology firms trying to jump in. There are already a number scuttling around the margins, and this will only grow if investment banks do not guard against it in every way possible.

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