Perfect storm drives investment banks to add FinTech innovation to their business models

Investment banks seek FinTech solution to perfect storm

Investment banks are seeking FinTech innovation to weather perfect storm in capital markets.

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The investment banking industry is in a state of flux, due to monumental costs and complexities associated with regulation, demands from capital markets customers for higher yields and lower fees, and declining trust among all parties. 

The digital revolution is also transferring more power to the buy-side, with greater levels of electronic, or self-directed trading, challenging the sustainability of investment bank intermediation. This is driving investment banks to seek technology outsourcing and capital markets technology innovation with FinTech partners

Capital markets technology empowers the buy-side

The ‘democratization’ of capital markets technology has already seen buy-side institutions assuming more control over their trading systems, reducing their dependency on the sell-side. This shift will continue as the buy-side becomes more empowered, seeks to preserve returns in a difficult market, takes more control over the quality of execution, and the sell-side struggles with its capacity to respond. 

For those investment banks that wish to thrive, now is the time to adapt with new business processes and capital markets operating models. The emergence of FinTech represents both a threat and an opportunity for the capital markets industry. 

Low entry barriers to FinTech innovation

Interestingly, technology itself has eroded barriers to entry in the FinTech marketplace. The cost of entry into the sector requires little capital or upfront investment, and the cost of computing and IT has fallen dramatically, even as the large banks continue to struggle with legacy infrastructure and traditional application burden. 

A symbiotic relationship is emerging in which traditional banks are suddenly creating FinTech-focused venture capitalist (VC) funds and partnering with start-up FinTech incubators. Demand for tech-inspired innovation is trickling into the thinking of investment banks and they are beginning to outsource critical IT infrastructure and manually intensive and costly processes. 

Source: KPMG's 'Unlocking the potential: The FinTech opportunity for Sydney.' October 2014

We expect to see further development of these approaches and a new level of flexibility in technology implementation. We also foresee a long-term, permanent shift in the way of doing business, as investment banks embrace financial technology in their daily dealings, including a revolution in the back-office space.

FinTech disruption for investment banks

FinTech is disruptive to banks’ ‘business- as-usual’ models, with a younger breed of innovators providing timely and creative solutions. FinTechs bring radical ideas to build, deliver, access and advance IT infrastructure at investment banks.

In capital markets, boards and bank leadership face a dilemma: They often are aware of FinTech innovation but can’t duplicate it within their own walls. The solution? Bypass their own IT providers in favor of FinTechs born in the digital age and not burdened by the entrenched industry constraints. 

However, for all of the benefits of FinTech, there are an equal number of potential pitfalls from the new disruptive technologies. These include security risks, regulatory attention and cultural issues. 

Investment banks eye Fintechs to revolutionize business models

As FinTech takes hold, innovation matters most where it can impact the stability, simplicity, costs of doing business and profitability in financial institutions. The futures of FinTech and the investment banking industry will become more interconnected. 

The so-called perfect storm of technology and capital markets will not blow over – particularly as new advances on the technology front coupled with evolving thinking from banking leaders hold such great promise for the industry. 

Ultimately, investment banks that emerge as the leaders in the decades to come will be those that are best able to quickly respond to changes in their external environment, business mix and operating models, as well as meet the needs of increasingly sophisticated and empowered clients. 

Partnering with FinTech companies provides large banks with a broader range and lower cost access to innovation, greater agility, potential investment opportunities and, above all, strategic optionality for an uncertain future, where collaboration will be king. 

Source: KPMG's 'Unlocking the potential: The FinTech opportunity for Sydney.' October 2014

Please contact:

Bob Hayward

KPMG in Singapore


Ian Pollari

KPMG in Australia 

+61 2 9335 8408 

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