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AN EXTRACT FROM KPMGS FRONTIERS IN FINANCE

The perfect storm


of technology and
capital markets:
The modern history of FinTech
Bob Hayward, KPMG in Singapore
Ian Pollari, KPMG Australia

Is 2015 the year of FinTech? A perfect storm of conditions is brewing that makes financial technology
(FinTech) the right solution for the right conditions at the right time. And that time is now.

The investment banking industry is in Power to the buy-side High technology,


a state of flux. Seismic shifts, brought Technological advances will continue to low barriers to entry
about in large part by the monumental reshape capital markets operating models Interestingly, technology itself has
costs and complexities associated and service delivery paradigms over the eroded barriers to entry in the FinTech
with increasing regulation, have altered next several years. The democratisation marketplace. Its never been easier and
the economics of investment banking of technology has already seen buy-side less expensive to start a new financial
forever. The challenges posed by the institutions assuming more control over services venture than today. It only
regulatory environment added to the the trading systems they employ, reducing takes a little capital to tap into almost
pressures from customers for higher their dependency on the sell-side to any capability required all delivered
yields and lower fees present challenges supply them with the tools they need. This on demand as a service through cloud
for banks capital markets businesses. shift will continue to gather momentum as computing anywhere in the world and
And as the digital revolution and reduced the buy-side becomes more empowered, requiring no upfront investment. Some
information asymmetry continue to seeks to preserve returns in a difficult of the leading financial institutions are
transfer more power to the buy-side market, takes more control over the quality encouraging this wave of innovation by
with greater levels of electronic, or of execution and the sell-side struggles opening up their existing systems through
self-directed trading, the sustainability with its capacity to respond. new Application Program Interfaces (APIs)
of intermediation must, at some point, that can help build new global-caliber
come into question. For those investment banks that wish FinTech software applications.
to thrive, now is the time to adapt with
There is also the issue of trust. Beyond new business processes and operational The price and timing couldnt be
the investment banking and capital models, steeped in innovation and better for development. The cost of
markets sectors legacy technology engineered for a new set of business computing and IT has fallen dramatically,
systems, trust has weakened between realities and more intense levels of even as the large banks continue to
customers, investors and the banks that competition, particularly from new world struggle under the weight of their
serve them, between counterparties that entrants. Therefore, the emergence of legacy infrastructure and traditional
trade with each other and even between FinTech represents both a threat and an applicationburden.
regulators. opportunity for the capital markets sector.

2015 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (KPMG International), a Swiss entity.
All rights reserved. Liability limited by a scheme approved under Professional Standards Legislation.
A symbiotic relationship is emerging in FinTech is disruptive to banks business- traditional national borders. In the case
which traditional companies saddled as-usual models. The advent of FinTech of FinTech, national borders might
by internal technology constraints are is generational figuratively and literally seem less relevant, but regulatory
cultivating relationships with smaller, with a younger breed of innovators agencies on all sides are keeping a
more nimble FinTech companies. Banks providing timely and creative solutions. close watch, particularly when it comes
with more than 100 years of history FinTechs bring radical ideas to build, deliver, to international sovereignty issues, legal
are suddenly creating FinTech-focused access and advance IT infrastructure jurisdiction, protecting customer data
venture capitalist (VC) funds, asking at investment banks. This union of and taxation.
staff to mentor start-ups in FinTech pacesetters and the established banking
incubators, forming research teams to order seems to work: FinTechs innovate in While regulators with risk management
understand every emerging FinTech ways that banks find hard to do. And the on their agenda currently are a perceived
business model, writing API layers across banks need this infusion of fresh thinking to barrier to FinTech ventures, we expect to
their current systems and inviting newly remain competitive or get ahead. see a higher level of coordination among
formed ventures to company-sponsored the banks, FinTech firms and regulatory
accelerators and hackathons. In capital markets, these disruptive officials. This might be easier said than
players are getting a seat at the table. done, but it would be a disservice to
Demand for tech-inspired innovation is Boards and bank leadership face a stifle such a promising industry change
trickling into the thinking of investment dilemma: They often are aware of at this stage of development.
banks. This traditional world is primed for FinTech innovation but cant duplicate
21st century modernisation. Though this it within their own walls. The solution? 3. Culture There is a cultural challenge
transition can be a challenge, outmoded Bypass their own IT providers in favor of on how technology will be accepted
IT systems are slowly being replaced FinTechs born in the digital age and not in institutional banks. For example, in
with modern technology often born of burdened by the entrenched constraints Seoul,the South Korean government
innovation outside the banking industry. in the industry. realises that FinTech is changing the
In some instances, investment banks nature of financial services. But the
are beginning to outsource critical IT The downsides of disruptive industry there is highly regulated,
infrastructure and explore the creation FinTech and the government worries about
of industry utilities in non-competitive, It is not surprising that for all of the benefits the viability of their existing banking
manually intensive and costly processes, of FinTech, there are an equal number infrastructure going forward; without
such as anti-money laundering (AML), of potential pitfalls. There are always FinTech innovation, is there a new
Know Your Customer (KYC) and customer some downsides with new disruptive risk of technology complacency and
onboarding. We expect to see further technologies, and the effects here are eventual obsolescence relative to other
development of these approaches and compounded in the world of investment countries? Without taking some steps
a new level of flexibility in technology banking and capital markets. to advance their financial technologies,
implementation, particularly as legacy South Koreas financial institutions
back-office IT systems are gradually 1. Security risks There are new risk risk losing competitive advantage by
removed from service. exposures in the new world. While the allowing their financial environment
banks and market providers generally to become non-competitive on the
Timing is everything consider themselves to be impenetrable globalarena.
We believe the shift in the current fortresses, FinTech can open the virtual
environment is more than a mere vault door to criminal activities. As the While innovation usually emerges
window of opportunity. In fact, we technologies advance, so too do hackers from highly refined areas of the world,
foresee a long-term and permanent abilities and resources. Today, we see sometimes, true innovation emerges
shift in the way of doing business, as that the nature of attackers has grown from more constrained environments,
investment banks embrace financial highly organised and even reaches the such as China and India, where
technology in their daily dealings. So, level of nation states. We are only now they are accustomed to working in
if you are not already engaged with discovering how big the risk will really environments of low cost expectations,
FinTech, the time is now. be for the industry, and whether or not unsophisticated consumers of financial
the threats will hamper acceptance of products, spotty infrastructure and a
We are already seeing a change in capital FinTech on a broaderlevel. rapid rate of change.
markets. Though these changes are not
nearly as evident as online and mobile 2. Regulatory attention When it Revolutionising financial
banking on the consumer side, a revolution comes to regulatory issues, the markets
is underway in the back-office space as the downsides for FinTech might even be In the highly globalised world of
new business model takes hold. more profound and immediate than investment and commercial banking,
potential security risks. Technology the financial capitals of New York and
Disruptive effects generally helps circumnavigate London are becoming the hubs of FinTech

2015 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (KPMG International), a Swiss entity.
All rights reserved. Liability limited by a scheme approved under Professional Standards Legislation.
technology front coupled with evolving
Digitalisation
Technology thinking from banking leaders hold such
innovation
great promise for the industry.

Falling cost
Areas of Ubiquitous
24 hr
The investment banking landscape is
FinTech
of computing data
changing rapidly and the stakes are high.
Ultimately, the firms that emerge as the
Changing
Cost
customer leaders in the decades to come will be
reduction
behavior those that are best able to quickly respond
to changes in their external environment,
business mix and operating models, as
Source: KPMGs Unlocking the potential: The FinTech opportunity for Sydney. October 2014.
well as meet the needs of increasingly
sophisticated and empowered corporate
innovation. FinTech firms are sprouting Competitive advantage is the name of the clients and investors.
up in places where the technology is game. As FinTech takes hold, innovation
needed most and where innovators matters most where it can impact Incumbent organisations will not be able
congregate. This crossroad where the stability, simplicity, costs of doing to successfully innovate on their own.
finance meets technology is potentially business and profitability in financial Partnering with FinTech companies
a whole new marketplace in the making. institutions. The futures of FinTech and provides large banks a broader range
Capital markets need to work with these the investment banking industry will and lower cost access to innovation,
FinTechs to adapt to new opportunities become more interconnected. The greater agility, potential investment
and they seem to be catching on. so-called perfect storm of technology opportunities and, above all, strategic
and capital markets will not blow over optionality for an uncertain future, where
particularly as new advances on the collaboration will be king.

KPMGs magna solution


The capital markets sector is seeing Robinhood is a zero commission
trader surveillance a number of exciting new FinTech stock brokerage based in Palo Alto,
companies emerge, across the US. It allows traders to place orders
full spectrum of the marketplace to buy and sell stocks, and the self-
(exchanges, investment, networks, directed orders will receive the best
brokerage, research and risk possible trade execution (across all
management). stock exchanges).
Cinnober started as four men Magna KPMGs Magna solution
working in a basement in Sweden, provides a tool for the proactive
now employs over 230 people. detection of unauthorised trading
Cinnober is an independent provider activity, allowing organisations to
of mission-critical solutions and monitor risk exposure in real time,
services to major trading and clearing flag instances of abnormal or risky
venues including exchanges. Their behavior, and investigate and resolve
TRADEExpress trading system is a cases before the risk escalates.
multi-asset trading platform serving Estimize based in New York, is an
high-volume trading venues globally. open financial estimates platform
eToro an online social trading tool which facilitates the aggregation
with social investment network, lets of fundamental estimates from
investors and traders tap into the independent, buy-side and sell-side
crowd and copy traders they like. analysts along with those of private
eToro encourages people to connect investors and students.
with one another to discuss, trade,
invest, learn and share knowledge Some of these FinTech companies
across the network. are featured in The 50 Best FinTech
Metamako a technology company Innovators report, produced by
based in Australia that specialises KPMG Australia in partnership with
in solutions for latency sensitive the Financial Services Council and
businesses. They build smarter Australasian Wealth Investments.
trading networks through ultra-low
latency devices for exchanges and the
trading community.

2015 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (KPMG International), a Swiss entity.
All rights reserved. Liability limited by a scheme approved under Professional Standards Legislation.
kpmg.com.au AN EXTRACT FROM KPMGS FRONTIERS IN FINANCE JUNE 2015

Six steps to capital markets FinTech adoption

1 2 3 4 5 6

Vision and
strategy Commitment Alignment Accessibility Collaboration Promotion

FinTech start-up It is important for To accelerate the Critical to any A centre of gravity Capital markets
activity tends to government (and development of the start-up is access to or physical focal and FinTech both
occur in large regulatory FinTech sector, funds and expertise point needs to be need a champion
metropolitan areas agencies) to alignment and Beyond this, there established and voice at local
Establish a coherent publicly state their coordination of is also a need for FinTech requires and global levels
and supportive commitment to activity and access to established This needs to be
entrepreneurial supporting the investment is regulators, capital markets' at both an industry
vision and strategy development of required (govern- government and organisations and level and also at a
for FinTech at a city the FinTech sector ment, regulators, data new ventures to political level
level (Sydney) Maximising the start-ups, industry, Government come together Promotion can be
Consider FinTech in opportunity will academia) providing a single Problems need to used as an
a broader global take strong Explore adjacent point of contact for be shared and safe effective tool to
capital markets commitment from opportunities and start-ups to remove environments attract capital,
context and government and benefits across bureaucracy created to truly investment and
particularly Asia as industry. sectors, e.g. Banks need a foster innovation. the best talent
an export financial services, clear point of (locally, regionally
opportunity. professional entry for FinTech and globally).
services. where various
stakeholders can
come together.

Source: Unlocking the Potential: The FinTech Opportunity for Sydney, October 2014.

There are new risk exposures in the new world. While the banks and market
providers generally consider themselves to be impenetrable fortresses,
FinTech can open the virtual vault door to criminal activities.

CONTRIBUTORS
Bob Hayward Ian Pollari
Principal Advisor Partner, Banking
Management Consulting KPMG Australia
KPMG in Singapore T: +61 2 9335 8408
T: +6564118172 E: ipollari@kpmg.com.au
E: bobhayward@kpmg.com.sg Ian Pollari is a partner at KPMG Australia and is currently the Head of
Bob is the leader of KPMGs CIO Center of Excellence for Asia-Pacific. In KPMGs Banking sector in Australia, leading the firms banking practice
this role, Bob works with IT leaders across the region to take maximum across Audit, Tax and Advisory. Ian co-authored the first Australian study
advantage of technology innovations to drive growth, enhance customer into Financial services technology titled, Building Momentum: The
experience and improve bottom line results. FinTech Opportunity for Sydney.

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2015 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (KPMG International), a Swiss entity.
All rights reserved.
The KPMG name, logo and cutting through complexity are registered trademarks or trademarks of KPMG International.
Liability limited by a scheme approved under Professional Standards Legislation.June 2015. VIC_N13043MKT.