Why there’s not much “capital markets” in fintech


The folks at FinTech Collective posted an interesting comment about the lack of “invest tech” within the fintech landscape. By “invest tech” they mean technology that serves investment managers. Having spent quite a few hours mapping the fintech landscape, I’d go further by saying there are not many new “capital markets” startup companies out there serving financial institutions generally, at least relative to the large numbers of payment, wealth management, bitcoin, P2P marketplaces, etc that seem to be attracting the bulk of venture funding.

A few observations about why the institutional space is different:

  • Sales cycles to banks and buyside firms are often long, involve larger budgets and multiple decision makers (IT and business). The POC process alone could take a startup months or years.
  • Banks have been cutting costs, and consolidating systems, not looking for taking a risk with new vendors (in NY at least this has benefited the startup community in that many founders and tech teams have spun out of these institutions). Buyside firms have fared better, though last year was one of the worst for hedge fund launches.
  • Many markets are quite “mature” from a technology perspective — e.g. equity exchanges had their renaissance in response to regulatory changes (Reg NMS) around 2005. There was a flurry of innovation — new electronic market places, connectivity providers, low latency providers (hardware, software, service) — that is now history. Similarly, trading platforms have generally been moving cross-asset and consolidating (OMS with EMS, front-office to back-office, etc).

It’s not all doom and gloom. Read any of the institutional-focused research and you’ll hear of a number of trends that could drive startup opportunities: regulatory change and new compliance requirements, changes in market structure (e.g SEF ecosystem), outsourcing of bank functions (e.g. KYC).

It may take some time to see more startups take root — the “core banking” and payments landscape was pretty slow for a period of time too. Given the proximity to so many financial institutions, NY-based startups have an incredible opportunity as some of these trends start to take hold.

And hopefully capital will start to move more broadly.

Disclaimer: The views expressed on this blog are mine alone.

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