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February 26, 2016updated 31 Aug 2016 12:29pm

How Fintech investment is changing the face of the capital markets

Analysis: And who is investing and why.

By Charlotte Henry

Finance is in the grip of major technological disruption, and investors are following the technologists. A Future of Banking report by Accenture found that "Global investment in fintech ventures tripled to $12.21bn in 2014".

This growth does not seem to be going anywhere either, and the sector has been attracting a lot of attention from major players in the investment world in recent months.

Data released by the non-profit Innovate Finance shows that the investment in the sector in the UK has soared by 35% to $901m in 2015, and that a total of £12.5b of VC money was invested into fintech in 860 deals globally.

Furthermore, two of 2015s biggest fintech rounds, $125m for Atom Bank, and $150m for Funding Circle, were from the UK, with three others worth over $50m.

The big banks, perhaps fearful of being overtaken by leaner and meaner firms, are taking notice. At JPMorgan, for instance, which is facing a period of belt tightening and job cuts, technology is one of the few things that is being invested in. At its investor day on February 22nd, the banking giant announced shifts in its budget in favour of technology.

Its chief operating officer Matt Zames said that it would increase spending on tech from $9.2bn to $9.4bn, and will work to designate around 40% of that money to new investments and technologies, an increase from 30%

On that same day CEO Jamie Dimon said of fintech "This has been going on my whole life … it’s just a bit faster," according to Seeking Alpha.

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The approach taken by JPMorgan is reflecting a view across the City and other global financial centres – if we can’t beat fintech, let’s join it.

To do so, some institutions are trying to develop fintech solutions internally. One such bank is Barclays. The bank has rapidly increased the speed at which it can process data by implementing a full Hadoop stack. This has allowed it to roll out products such as Smart Spend, which gives users advices on reducing their utility bills based on demographics, and Local Insights, which gives SMEs insight into local economic indicators.

UBS is developing fintech internally too. It built a smart bond application on the Ethereum platform. The bank says that it can recreate a bond’s issuance, interest calculation, coupon payments and maturation processes.

Other institutions have chosen to pursue partnerships with existing fintech firms, instead of building software and applications from scratch themselves. For example, in January 2016, BBVA Compass announced that it was moving into the world of roboadvisers by signing up with data driven investment tool FutureAdviser. It said the partnership will help its customers improve their after-tax, risk-adjusted rates of returns.

Funds have also been started by institutions, investing in companies to try and get the best of both developing technology and partnerships. It is also probably better for these established institutions to have the upstarts inside the tent.

Barclays, for example, has launched two new dedicated funds that total £150m, with the specific aim of boosting companies under their High Growth Venture Debt Fund and Innovation Finance programmes.

Sean Duffy, Head of Technology, Media & Telecoms at Barclays told CBR that his bank will "absolutely" continue to be involved in the fintech space.

"We are committed to supporting fintech companies, it is an important sector for us to engage with," he said. "As a bank, we have a good history supporting the sector and as the digital revolution keeps pace, we know through our experts, funding, services and networks that we can provide the right tools to support and foster this growth."

For Duffy, it is important his firm gets into this space because "We recognise the importance of the innovation that fintech can bring to our business; these companies are dynamic and they have the opportunity to disrupt – engagement with fintech is key to maintaining relevance and championing growth."

Meanwhile, UBS entered an accelerator itself, becoming the first global bank in Level39 in London, and it has established "innovation spaces" too.
Algorithms have been another technological development that has shaken up the world of capital markets and trading, despite the initial scepticism shown by leading investor Warren Buffett some three decades ago in one of his famous letters to investors.
Drilling down into the specific subsectors of fintech, blockchain distributed ledger technology is attracting significant amounts of attention from major players.

A key endeavour is Hyperledger – an open source collaboration project between many of the biggest names in finance and tech, run by the Linux Foundation. The finance contributors include Deutsche Borse, ABN Amro, JPMorgan, BNY Mellon, and Wells Fargo.

The group says it wants "to advance blockchain technology by identifying and addressing important features for a cross-industry open standard for distributed ledgers".

In terms of individual institutions, UBS has donated blockchain technology to fundraising efforts for an HIV cure, and has conducted experiments to create a virtual coin using real currency to use blockchain to settle transactions that take place on finance platforms.

JPMorgan tested the technology too, conducting an experiment with 2,200 customers for transfers of US dollars between London and Tokyo.

As well as developing or incubating technology, major finance firms are also investing directly in fintech firms during private funding rounds. Notably, Goldman Sachs has put money into Square, the payments firm started by Twitter CEO Jack Dorsey, although it is not known exactly how deep into its pockets the investment banking giant went.

Hedgefunds are getting in on the action too. US start-up Credit Karma, which allows customers to gain access to their credit score for free, raised $175m in June 2015, with money coming in from fund such as Tiger Global, Viking Global and Valinor Management.

Panmure Gordon technology analyst George O’Connor told CBR that with money flowing into challenger banks like Fidor in Germany, and Atom, Starling, and Mondo in the UK, "it is as if there was a collective light bulb moment – and investors get the fact that new companies are doing new things with technology as the enabler."

O’Connor also said "Relative to other asset classes getting into companies and fintech, and that early stage investing, has been lucrative."

This seems to be the approach taken by Barclays. "Barclays is also committed to supporting high growth businesses," said Duffy. "We recognise that they represent the fastest growing employer in the UK which makes them fundamentally important for the UK economy."
It is certainly true that fintech is becoming a major export for the UK, and London in particular, thanks to the geographical closeness of the

Silicon Roundabout Tech Hub, and the City. A November 2014 report by Accenture for UK Trade and Industry (UKTI) said: "Deal volumes here have been growing at 74% a year since 2008, compared with 27% globally and 13% in Silicon Valley."

The Innovate Finance data referred to above showed that the UK had the highest volume of deals outside the US, and the third highest total investment behind the US and China.

Duffy sees this as a consideration for Barclays’ strategy too. He said: "In providing a lending framework that can support these companies through their growth, we are increasing the appeal of the UK as a destination not only to start a business, but to grow. This is important in maintaining the UK’s competitive advantage in the globalised economy and providing a viable alternative to the US by increasing the amount of capital available to high growth businesses and making the environment more accommodating to scaling companies."

Is this just a bubble though, a mere fad? O’Connor said that fintech "is a visibly expanding the available market," and Duffy similarly believes that "it will have longterm influence in banking and capital markets."

Indded, Duffy is clear in his belief that that fintech is set to last. "Fintech will continue to play a role in capital markets and banking more generally," he said.

There are a variety of reasons for his positivity. "The relatively low barriers to entry for fintech start-ups means that there will continue to be high levels of disruption in this space. This is further supported by the fact that leading financial institutions are helping to foster this innovation through accelerator and mentoring programs, as well as raising funds for strategic investment," he said.

It is clear than that there is serious money going into new technology in the capital markets space, and the big players there are in fintech for the longterm. It therefore seems likely that money will continue to flow into this bullish technology sector.

One thing is clear though, it is not just about profits and the bottom line. It may be the only way that traditional finance can hold of the upstarts snapping at their heels.


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