London, 1 March 2018 – The World Federation of Exchanges ("The WFE"), the global industry group for exchanges and CCPs, today published a joint report with global management consultancy McKinsey & Company's Banking & Securities Practice ("McKinsey"), on the fintech landscape in the Capital Markets Infrastructure (CMI) industry.
The report - entitled Fintech Decoded: Capturing the opportunity in capital markets infrastructure - looks at potential uses of new technologies across the sector, and areas likely to see the most innovation. It also outlines several strategic priorities that Capital Markets Infrastructure Providers (CMIP) - such as exchanges, CCPs, trading venues and securities depositories - can adopt to ensure they maximise the fintech opportunity in their markets.
The report is based on a survey of 46 members of the WFE, along with in-person interviews. It is supported by insights from McKinsey's Panorama fintech database, which catalogues fintech innovation globally.
- In this decade, the evolution of fintech activity in the CMI sector has outpaced other areas in financial services, growing 277%, compared with corporate banking (186%) and payments (184%). Whilst overall investment in fintech has plateaued since 2015, funding into CMI fintech continued its rapid growth.
- Fintech-led innovation can be found across the entire CMI value chain. While fintech activity is highest in the access to capital area, the WFE members say that the post-trade services space currently attracts the highest attention in their organisations:
- Access to capital – by creating innovative way to reach and serve issuers and investors, and by broadening the range of asset classes available:
- Trade execution – by gaining new efficiencies;
- Post-trade services – by bringing simplification, automation and improved security;
- Data, analytics, and information services – by developing new way to mine and interpret data; and
- Operations and technology – by driving cost efficiencies, lower latency, and reduced operational risk.
- At most points of the value chain, fintechs are potential partners to CMIPs, rather than competitors, shaping the industry by simplifying the infrastructure, and opening new channels of customers and revenues.
- While the boundaries among fintech technologies may blur, the solutions they deliver can be grouped into four main categories:advanced analytics and Artificial Intelligence (AI); Distributed Ledger Technologies (DLT), including blockchain; cloud and quantum computing; and automation and robotics.
- Of these, the WFE's survey participants identified DLT as the technology which has the most potential, though it may also be the furthest from realisation at scale. There are some initial use cases, such as the implementation of a DLT clearing and settlement system at the ASX, but these examples are, to date, limited.
- The use of advanced analytics and AI is set for rapid growth, as the volume of data in the capital markets grows. Cloud and quantum computing will bring greater efficiency, and drive depth in both markets and asset classes. Automation and roboticsare likely to improve the productivity of post-trade services, alongside the evolution of RegTechs in the risk management and regulatory reporting space.
- Forty-one percent of respondents noted that large technology companies (firms such as Amazon, Google and Microsoft) could be the most impactful in the CMI space in the next five years, while 39% expect incumbent CMIPs to have the largest impact in the same period. About 20% of the survey respondents see this disruption coming from start-ups.
- The survey found that CMIP's view partnership-driven approaches such as collaboration agreements (40%) and joint ventures (25%) as the most efficient relationship models with fintechs, followed by investments (both minority and majority) both at 13%. Only 9% of the survey respondents see acquisition and integration as the most effective route.
The report concludes that it is vital for CMIPs to understand that fintech is a means to a strategic end, and not a strategy in itself. To that end, the report outlines three strategic priorities that CMIPs can adopt when considering how best to engage and work with fintech: protect your core business from erosion; modernise existing business practices and operations; and capture new business opportunities through fintech. By taking this focused, proactive approach, CMIPs can ensure they benefit from the changes in their industry that will be brought about by fintech.
Nandini Sukumar, CEO, The WFE commented: "This report seeks to demystify fintech in the context of the market infrastructure industry. Our aim is to help the industry better understand and identify the fintech opportunity - and provide practical solutions to capturing that opportunity. Our survey respondents are clear that they see positive changes to come in the future as a result of these various technologies and solutions."
Matthias Voelkel, McKinsey Partner and report co-author said: "It is essential to CMIPs to understand that fintech is a means to a strategic end, and not a strategy in itself. We have identified roughly 700 CMI-related fintechs at various stages of development and activity across the capital markets infrastructure value chain – incumbents, therefore, need to focus. An unfocused investment approach would be unmanageable and expensive."
Siobhan Cleary, Head of Research & Public Policy, The WFE commented: "While we are yet to see numerous large-scale use cases of fintech applications, data suggests that almost half of CMI-related fintechs are already working in AI, with more than a quarter engaged in DLT. We believe that over time, and through greater collaboration between fintech and market operators, we will start to see more tangible results."
Markus Röhrig, McKinsey Partner added: "Our research indicates that at most parts of the value chain, fintechs are potential partners to incumbent CMIPs rather than competitors. Particularly, within post-trade services, 90% of fintechs aim to provide services to incumbents, i.e. follow B2B models. On the contrary, at the front end of the value chain, in the 'access to capital' space, 82 percent of fintech business models directly address end customers, i.e., have a B2C focus, and therefore represent more of a threat to incumbents."
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About the World Federation of Exchanges (WFE):
Established in 1961, the WFE is the global industry association for exchanges and clearing houses. Headquartered in London, it represents over 200 market infrastructure providers, including standalone CCPs that are not part of exchange groups. Of our members, 36.8% are in Asia-Pacific, 42.6% in EMEA and 20.6% in the Americas. WFE exchanges are home to nearly 45,000 listed companies, and the market capitalisation of these entities is over $82.5 trillion; around $81.8 trillion (EOB) in trading annually passes through the infrastructures WFE members safeguard (at end 2017).
The WFE FinTech Working Group was set up in 2017, and comprises senior technology and innovation representatives from nearly 20 WFE member exchanges and CCPs globally. The purpose of the FTWG is to enable members to develop comprehensive and coherent industry policy positions, to help shape regulatory thinking in this space, while also sharing information and best practice about new developments.
The WFE is the definitive source for exchange-traded statistics, and publishes over 350 market data indicators. Its statistics database stretches back more than 40 years, and provides information and insight into developments on global exchanges.
The WFE works with standard-setters, policy makers, regulators and government organisations around the world to support and promote the development of fair, transparent, stable and efficient markets. The WFE shares regulatory authorities' goals of ensuring the safety and soundness of the global financial system, which is critical to enhancing investor and consumer confidence, and promoting economic growth.
For more information, please contact:
Head of Communications, The World Federation of Exchanges
Phone: +44 20 7151 4137 / +44 7850 287 685