Necessity is the mother of invention, and our volatile times make it especially necessary to improve operational efficiency, compliance processes, insights through analytics, and driving business development through proposals and improved customer service. Volatility catalyzes investment in tech solutions and galvanizes the opportunity for fintechs to help. With the more agile nature of the Buyside allowing for easier adoption of innovative solutions and the evolution of innovation within the industry, now may be the time for a rapid growth in partnerships between the Buyside and start-ups.
The technological journey
The Sellside led technology innovation, with its larger balance sheets and bigger budgets to fund internal teams and build internal tools. The initial strategy was to “build not buy” as the pool of vendors was limited as they needed to be established and have a proven revenue track record. Only big companies like Sunguard, Smartstream, IBM, HS Markit and Fidessa were present in the market.
Internal tools were often built on old technology that, over time, needed patches to make them safe in the short term, but had potential problems in the longer term. After years of construction, the ghosts of now-defunct applications are scattered throughout financial services organizations.
Over time, due diligence and sourcing logic have been adapted to allow small businesses to compete. Banks have started to create their own innovation centers to help them discover new technology applications, and strategic risk arms have been formed to enable them to benefit from reduced risk, contribution to development and product interoperability, and being in the game to realize potentially huge benefits from their investments.
The Buyside Situation
Buyside has had a different profile and approach, with its tighter margins and greater competition limiting investment in new technologies. With the notable exception of giants like Fidelity, Aviva, and SEI, and those that are divisions of big banks like HSBC AM and JPM AM, Buyside firms lack strategic investment arms. Likewise, there are a few outliers that have built their own technology and even sold it to their competitors, like Blackrock and Aladdin.
The annual TradeTech conference is also a testament to the growing interest in innovative Buyside technologies. On a collaborative level, the Investment Association’s own IAEngine Innovation Center, launched in 2018, shows recognition of the need to identify, develop and adopt technology solutions, and the benefits of this strategy, for the Buyside.
As Gillian Painter, Head of Membership and Engine, The Investment Association, describes, “Engine was created to drive the adoption of technology in investment management for the benefit of and in response to the changing needs of our clients. We work with over 150 FinTech companies and help them spread the word about their innovative solutions and work collaboratively with the industry. Cultural and societal changes are forcing our sector more than ever to think differently and innovatively. By working with solution providers, we can create efficiencies, reduce costs and capitalize on opportunities. »
Thus, the current context is an industry under pressure. Managers are faced with the cost of doing business, increasing regulatory and compliance requirements, active versus passive debate, and the desire to improve returns. Customers also add to the squeeze as all margins are affected. As the sector grapples with the fallout from the pandemic and war in Ukraine, it is arguably the biggest players on the Buyside and the smaller niche, bespoke boutique businesses will be able to weather the storm more easily. of volatility with their larger resources or more targeted offerings.
For many midstream companies, it will be all the more important to develop digital platform strategies that deliver real-time, smooth and frictionless product offerings, as well as smooth operational and compliance processes through automation and simplification. For those who haven’t diversified into new markets and geographically or seriously invested in technology and data resources, this can have a huge impact on performance. With today’s endemic stress, if the industry doesn’t self-disrupt, it will be disrupted.
The landscape of the future
Technology will have a profound impact on all aspects of Buyside, from trading and execution to operations and distribution. The shifting sands of the present have already led to a diversification from liquid to illiquid assets such as REs and PEs, with further changes to come with the democratization of private assets and the accompanying complexities around value. and transactional information and modeling requirements.
The adoption of new technologies also brings new aspects of governance, risk management, security, and partner management that come with the modernization of operations, but innovative solutions worth their salt will address these in their offerings.
On the buy side and the sell side, players are at different stages of their journey. Some have been active, some have nibbled at the edges, and some have come late to invest properly. But there’s growing recognition on all sides that it’s how you spend it, not just how much. Companies cannot do everything themselves. There is a line between proprietary technology that provides a “secret sauce,” that competitive advantage, and operational technology that can be purchased to streamline processes and reduce costs. This is where start-ups come into their own and can add great value to Buyside operations.
With Buyside’s tighter margins and shrinking budgets, effectively deploying innovation investments has always been more critical, and partnering with innovative startups is less expensive, risky and time-consuming than building. Although Buyside outfits do not have bank balance sheets, they are more nimble with less bureaucracy and approval levels that make it easier to adopt new technologies.
With Sellside’s trend of repositioning their strategic venture capital arms into their asset management divisions, they are moving towards investing in and owning the technology others are building in order to operate better and become more competitive. It remains to be seen whether the Buyside begins to identify early-stage startups that are strategically important to their operations to gain first-mover advantage and significant upside potential.
What is clear, however, is that innovation and digitization are essential in an increasingly competitive environment to ensure maximum efficiency and competitive advantage through lower fees and reduced reputational risk, and to enable businesses to target customers more accurately by leveraging data sources. The time has come for Buyside and FinTechs.
About the Author: Steve Pomfret is the CEO of Cygnetise. Cygnetise applies blockchain technology to revolutionize the Authorized Signer Management (ASM) process. The Cygnetise solution solves the problem of ASM by enabling operations and finance departments to digitally manage and share authorized signatories in real time, reducing risk, lowering costs and making the process more efficient, transparent and secure. .
