Why Buyside and fintechs that improve compliance will boom

Necessity is the mother of the invention, and our volatile times make it especially necessary to improve operational efficiency, compliance processes, insight through analysis and increase business development through improved customer proposals and service. Volatility catalyzes investment in technological solutions and gives fintechs the opportunity to help. With the more flexible nature of Buyside that enables easier use of innovative solutions and the development of innovation in the sector, it may now be time for rapid growth in partnerships between Buyside and start-up companies.

The technological journey

The Sellside has led technological innovation, with its larger balances and larger budgets to fund internal teams and build internal tools. The original strategy was “do not buy” because the supplier group was limited as they had to be established and have a documented revenue record. Only larger companies such as Sunguard, Smartstream, IBM, HS Markit and Fidessa were on the market.

Internal tools were often built on old technology that over time required updates to make them safe in the short term, but which caused potential problems in the longer term. After many years of construction, the ghosts of now defunct applications are strewn across financial service organizations.

Over time, due diligence and procurement rationale were adapted to allow smaller companies to compete for the business. Banks began to create their own innovation hubs to help them discover new technological applications, and strategic venture arms were formed to enable them to take advantage of reduced risk, input on product development and interoperability, and have skin in the game to realize potential great 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 technology. With the notable exceptions of giants such as Fidelity, Aviva and SEI, and those that are divisions of larger banks such as HSBC AM and JPM AM, Buyside firms do not have strategic investment arms. In the same way, there are a few outsiders who have built their own technology and even sold it to their competitors, as with Blackrock and Aladdin.

The annual TradeTech conference is also a testament to the growth in interest in innovative technology from Buyside. On the collaborative front, Investment Association’s own IAEngine innovation center, launched in 2018, recognizes the need to identify, nurture and implement technical solutions, and the benefits of this strategy, for Buyside.

As Gillian Painter, Head of Membership and Engine, The Investment Association, describes, “Engine was created to drive the introduction of investment management technology for the benefit and changing needs of our clients. We work with more than 150 FinTech firms and help them “Raising awareness of their innovative solutions and collaborating with industry. Cultural and societal change requires our sector, now more than ever, to think differently and innovatively. By collaborating with solution providers, we can create efficiency, reduce costs and seize opportunities.”

So the current backdrop is an industry under pressure. Managers struggle with the costs of the business, increased requirements for regulations and compliance, the active versus passive debate and the desire for increased returns. Customers also increase the pressure as all margins are affected. As the sector struggles with the fallout from the pandemic and war in Ukraine, it is undoubtedly the larger players at Buyside and the smaller niche, tailor-made boutique companies will be able to more easily cope with the storm of volatility with their larger resources or more targeted offerings.

For a large number of companies in the middle, the development of digital platform strategies that provide seamless, reduced friction, real-time product offerings and smooth operational and compliance processes through automation and simplification will be all the more important. For those who have not diversified into new markets and geographically or seriously invested in technology and data resources, it can be of great importance when it comes to performance. With today’s endemic stress, if the industry does not self-disrupt, it will be disrupted.

The landscape of the future

Technology will have a profound impact on all aspects of Buyside, from trade and execution to operation and distribution. The changing sands of today have already led to diversification from liquid to illiquid assets such as RE and PE, with several changes coming with the democratization of private assets and their attendant complexity around value and requirements for transaction information and modeling.

The use of new technologies also brings with it new aspects of management, risk management, safety and partner management that arise from the modernization of operations, but innovative solutions worth the salt will address these in their offerings.

Buyside, and Sellside, players are at different stages of their travels. Some have been active, some have taken the plunge, and some come late to invest properly. But there is a growing recognition from all sides that it is how you use it, not just how much. Businesses can not do everything themselves. There is a line between proprietary technology that delivers a “secret sauce”, the competitive advantage, and operational technology that can be purchased to streamline processes and reduce costs. This is where start-ups really come into their own and can add great value to the Buyside business.

With Buyside’s tighter margins and smaller budgets, efficient distribution of investments in innovation has always been more important, and partnerships with start-up innovators are less costly, risky and long-lasting than building. While Buyside outfits do not have bank balances, they are more agile with less bureaucracy and approval levels that make it easier to adopt new technology.

With the Sellside trend of repositioning their strategic venture arms in their asset management departments, they are evolving to invest in and own the technology that others are building to make them operate better and become more competitive. Whether Buyside begins identifying early-stage start-ups that are strategically important to their business to achieve first-mover advantage plus significant potential upside remains to be seen.

What is clear, however, is that innovation and digitalisation are crucial in an increasingly competitive environment to ensure maximum efficiency and competitive advantage through lower fees and reduced reputation risk, and to enable companies to target customers more accurately by leveraging data sources. The time is ripe for Buyside and FinTechs.

About the Author: Steve Pomfret is the CEO of Cygnetise. Cygnetise uses blockchain technology to revolutionize the Authorized Signatory Management (ASM) process. The Cygnetise solution solves the pain of ASM by enabling operations and finance departments to digitally manage and share authorized signatories in real time, reduce risk, cut costs and make the process more efficient, transparent and secure.