The application of fintech in capital markets is being vastly underestimated by both banks and startups as other areas of banking steal the spotlight – and funding – new research reveals.
Venture capital cash is failing to flow into fintech specialising in capital markets, according to the new report from Boston Consulting Group, adding that only a minority of startups are working in this area.
Just four per cent of VC money going into fintech makes its way to capital markets startups and only seven per cent of fintech startups are active in the capital markets space, the consultancy estimates.
And despite the hype around blockchain, which almost two thirds of banks expect to implement by 2019, it still attracts the least funding along with other post-trade technologies.
"The vast majority of fintech disruption in the banking industry is happening on the retail and corporate sides, where technology provides a way to serve large and diverse client bases while still trying to reduce the cost of customer acquisition across a number of distribution channels," said the report.
"The prospect of mass adoption makes equity financing readily available, with numerous VC firms on the look out for the 'Uber moment' of finance," it said, adding that the group had identified "a large imbalance" in the amount of VC investment in retail and corporate banking compared to capital markets.
The more specialised nature and greater regulation of capital markets were cited as two reasons it is being overlooked by investment banks, clearing houses, exchanges and VCs.
But this gap also provides an opportunity for financial institutions to collaborate with fintechs to both their benefit.
Bank-backed fintechs working on areas specific to capital markets are more likely to then attract funding from venture capitalists and other investors, the report found.
"Incumbents, by being active investors, can shape business models and help fintechs evolve into collaborative suppliers rather than disruptors," it said.
It also pointed towards a "perfect storm" of declining revenues on the sell, the loss of technical talent, and the rise of technology such as cloud, machine learning and big data as an impetus for financial institutions to take advantage.
"Banks must take action now both to protect their own interests and to boost the capital markets fintech ecosystem as a whole," it said.
Benefits of greater collaboration with fintech startups include better client relationships, streamlined costs and improving compliance with regulation, the report suggested.