Capital Markets Innovation Is Bogus
When I was discussing innovation with a couple of senior business leaders from a Boston-based investment company, the word one of them used to describe innovation on Wall Street wasn’t "bogus" as the headline states, but a different "B" word. I’m sure you can imagine what that word is, but the point is the same: There is little technology innovation happening in the capital markets.
At Wall Street & Technology, our editors are regularly approached by companies looking to talk about their latest innovations. Nine times out of 10, the supposed innovation isn’t innovative at all. Often, it’s just a slight improvement on an existing technology, or perhaps a new strategy at the bank. Offering a retirement calculator to 401(k) account holders isn’t innovative. Rolling out the latest version of your mobile app isn’t innovative either.
Similarly, shaving a couple of nanoseconds off of your trading system’s latency isn’t innovative either, unless you are deploying a completely new technology or relying on some sort of laser beam that zaps data at the speed of light. (I joke about that now, but in a few years, who knows?)
There are a number of reasons why innovation has left Wall Street. The deep financial crisis left many large financial firms wounded, both on their balance sheets and in their mindsets. "The psychological impact of the crisis on the financial industry should not be underestimated," says Karl Antle, managing partner at ValueStream Labs, a firm that helps connect entrepreneurs, investors, and financial services professionals. "The banks were permanent fixtures in the economy that suddenly had to take bailout money to stay in business."
The resulting mindset that settled over the industry, not to mention the drastic budget cuts, had most managers and leaders trying to find ways to reduce risk, not develop innovative technology or products. More than five years after the September 2008 collapse of Lehman Brothers and the start of the financial crisis, the clouds over the industry are just starting to part.
Perhaps a larger obstacle to innovation in the capital markets, however, is the compliance organization at most financial firms. Most large financial institutions require any new technology or service provider to meet stringent compliance requirements even before allowing the business to get a chance to consider the value of a service or technology. How can a business leader even entertain a new way of doing things through technology if he isn’t even allowed to meet with a potential vendor?
"Wall Street stifles innovation at every turn," Antle continues. "Compliance often leads the decision process." And, after all, what does compliance know about innovation? "The sell side, especially, has not changed its way of thinking when it comes to startups," and often excludes them when they search for new technology because they are deemed as too risky, he adds.
Even the shared workspaces where many new companies are starting would simply be considered too risky for most banks. The open floor plans, tables as desks, lounges, couches, and communal work areas are rarely, if ever, found at a bank.
The buy side, however, has started to embrace the startups, as they are looking for new technology to supplement the existing tools that are provided by the established sell-side shops. “The brokers still have development groups sitting far away from the business units, so it is hard to have good communication with the technology teams,” a former senior technologist at a New York-headquartered brokerage firm told me over coffee recently. True, there are exceptions, but many development groups are located in Jersey City or Princeton while their business counterparts remain in New York City.
As a result, many frustrated financial services workers have left the industry in the past couple of years to launch their own startups that focus on specific problems in the financial industry. Although specific numbers are hard to come by, there are definitely many hundreds of new fintech startups in New York, Boston, and Chicago alone. Some startups are nothing more than a couple of people with a good idea, while others have a good business plan and are even gaining financial backers.
[FinTech start-ups are popping up all over Manhattan. To see ValueStream's midtown co-working space, visit: Inside the NYC FinTech Startup Scene.]
Across Manhattan, co-working spaces are sprouting up where startups are flourishing. Many are solving real technology and business problems, gaining investors and finding ways to succeed despite the reluctance of many established Wall Street firms to work with startups. Many are focused on data analytics or big data solutions for financial services, in addition to mobile offerings.
Hopefully, the fintech startup scene will help breathe some life into an industry that was once on the cutting edge of speed and data analytics. Wall Street & Technology will be taking a look at a number of these newer companies during the next few months in our "Entrepreneur In Focus" series.
Our first Entrepreneur In Focus is a company called Better, which is taking direct aim at MDM player Good. Here's the article: Better Takes on Good's Mobile Security Solutions.
Take a look and let me know what you think. Does Wall Street need an innovation jolt, and can newer entrants to the fintech scene make it happen?
Greg MacSweeney is editorial director of InformationWeek Financial Services, whose brands include Wall Street & Technology, Bank Systems & Technology, Advanced Trading, and Insurance & Technology. View Full Bio
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