Although the global financial crisis that began in 2007 largely has entered the history books by now, it has had major effects on the financial industry that appear to be permanent. Practically every market is more competitive today compared with a decade ago, and market participants have adjusted to thinning margins in their core businesses, together with uncertainty caused by structural changes in markets.
Most industry watchers likely agree that this state of permanent change will be the norm in the years ahead as well. On one hand, trading firms need to make use of new technology to capture market opportunities, while on the other, they also must be concerned about the return on investment when addressing an increasingly unforgiving regulatory environment.
Changing market structure drives technology adoption
A recent TABB Group survey identifies the biggest challenges facing derivatives market participants as Regulatory complexity (51.2%), Lack of technology resources (25.0%) and Adjusting to market structure (14.3%). Survey respondents include 72 buy-side, sell-side and proprietary trading firms that are active in global derivatives markets. Some 50% of these companies stated that they will deploy a new trading platform by 2018 in order to keep up with regulatory and operational challenges.
Firms are struggling to fulfill both internal needs and external requirements when selecting a derivatives platform; in the TABB Group survey, these include Functionality (95%), Cost of ownership (87%), Compliance capabilities (84%), Ease of customization (83%) and Exchange coverage (81%).
Buy, build or both
Should a firm buy a solution from a trading technology vendor, or choose to build or enhance their own systems with new functionality, or do both in order to meet regulatory requirements and specific trading needs?
Legacy systems used by large financial institutions may not be as flexible and extensible as required to allow agile innovation and rapid deployment of new functionality. Another challenge is the cultural differences between the FinTech industry and banking. FinTech operates in an environment characterized by rapid innovation and business disruption, while banks – which focus on carefully managing risk – often transform more slowly and take pride in steadiness.
Bank-FinTech partnerships hit product/market fit
In a recent Aite Group report, key financial institutions executives disclose that they are abandoning the concept of developing their trading technology in-house, in pursuit of a competitive edge in the marketplace. Firms need to have a tech strategy that aligns with their business strategy and work with technology vendors committed to ongoing innovation.
Financial institutions/banks have realized the importance of collaborating with Fintech companies to address internal needs and external requirements swiftly and efficiently in the constantly changing market environment. The Bank-FinTech partnership trend is further backed by findings from PricewaterhouseCoopers (PWC) and Deloitte Global reports. A PWC report showed that 82% of the respondents expect to increase FinTech partnership in the next three to five years.
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