Banks must act now to benefit from fintech boom – BCG Report

In a recently released whitepaper, the Boston Consulting Group has called upon banks and the entire capital markets ecosystem to take action now in order to gain benefits from the fintech revolution.

Titled “Fintech in Capital Markets: A land of Opportunity”, the paper pointed out that capital markets fintechs are attracting less than their fair share of funding. This is evident from the fact out of 8,000 fintech startups that the BCG tracks globally, only about 570 are active in the fintech space. In addition, of the $96 billion (approx.) in cumulative venture capital funding since the start of the millennium, only about $4 billion has been specifically deployed to CM fintechs.

 The BCG also noted that despite all the hype, blockchain and in general post-trade attracts limited funding. Explaining the reason for this shortfall, the paper says that this may be due to the highly-specialized and regulated nature of capital markets, which may hinder outside investors.

"[W]hen fintechs are backed by incumbent banks, they attract higher funding and mature more quickly than when backed solely by VC firms”, BCG said.

It added that for the fintech boom to realize its full potential, a number of barriers must be overcome in the way that fintechs relate to investment banks and the CM ecosystem. This includes simplifying IT architecture, developing industry standards, improving collaboration and mitigating vendor risks.

According to the BCG, there have been three major fintech waves and the latest wave of digitization is being fueled by incumbent banks’ rapid digital transformations. It added that the latest wave is characterized by paradigm shifts in technology, driven by the proliferation of cloud hosting, AI, cognitive computing, p2p and distributed ledger technologies.

BCG emphasizes that banks must take action now to protect their own interests and to boost capital markets fintech ecosystem as a whole. These actions include focusing on standardization, opening the banking framework to reduce integration costs, and improving strategic principal investment capabilities to overcome the lack of VC funding. In addition, banks also need to manage their technology stacks like investors and quantify the value of their portfolios.

“A wait-and-see approach is no longer viable”, BCG said. “Banks that defer their options will lose significant value by not participating in the innovation process”.