May 28, 2018
Big tech is pushing into the edges of retail finance. How broadly and deeply will they disrupt institutional markets?
By Harry Stahl, Director of Strategy & Solutions Management, FIS
Big tech companies such as Amazon, Apple and Google have enormous capabilities to deal with individual consumers and process vast amounts of information. They have already transformed consumer purchases and payments, and appear to be on the cusp of a broader expansion into consumer finance – potentially disrupting consumer banking and shifting the landscape for technology providers in that space. FIS is actively engaged in this change. In 2015, for example, we marshalled our scale to mass enable mobile payments for more than 200 financial institutions.
Will big tech disruption in the consumer space impact the institutional markets? It already is having impact, but in different ways – some of them positive.
First, direct competition with institutional players will be tough. Data complexity is a real barrier to entry. Consumer giants have massive amounts of relatively simple data about individual consumers. By contrast capital markets represent smaller volumes of data, but a significantly more complex business that includes a web of interrelated buy-side and sell-side firms; an ever-evolving range of complex products with long transaction lifecycles; complex account relationships, portfolio and fund structures; multiple execution and clearing mechanisms; complex and varied accounting and regulatory reporting rules.
Of course, individual finance and payments isn’t a simple business. But the operations and technology required to support the institutional world is significantly more complex. No barrier is insuperable, but it raises the cost and slows the process for would-be competitors. We may find that big tech only wants to go so far in capital markets. In short, they may not be not the immediate and obvious threat to capital markets that they are in retail finance.
That said, big tech firms are transforming expectations for user experience and data access – a digital transformation. Consumers now expect their experience to be easy and seamless. And institutional users are also consumers, so they have come to expect instant access to comprehensive, detailed information, in whatever format they want, wherever they are, on whatever device they are using.
But there’s an extras hurdle to achieve digital transformation in the institutional space. It requires the same seamless user experience, but underneath are layers of infrastructure and systems to manage and assemble information from the complex web mentioned earlier. This applies to portfolio management, risk, order management and execution, as well as investor and regulatory reporting information. An ergonomic interface is only useful if you’re looking at all the right data, in the right state, at the right time.
Can institutional players achieve this? The piece parts are in place. Numbers are right. Lifecycle events happen. The values are adjusted. Mutual funds post their net asset values at the end of the working day across tens of millions of positions. Investors and regulators get their reports.
The challenge of digital transformation is to assemble and transform all of this to deliver more value to customers and other stakeholders. And this is clearly a positive impact on the industry. Firms that are succeeding at digital transformation are growing noticeable faster than the rest of the industry, according to our 2018 Readiness Report.
The other positive disruption of big tech is on infrastructure. They have massive computing power, can spin up and shut down environments easily and quickly in response to fluctuations in demand, and are investing at scale in cybersecurity. By providing these capabilities to the wider world through the public cloud, they are arguably increasing overall efficiency for other technology firms.
Big tech is having a huge impact – competitive but also transformative. And they are smart and can move fast so they’re interesting to watch in general. Those of us in capital markets should keep our eyes open, even when they’re not a direct threat.