In this blog we're going to discuss how financial institutions are starting to behave like fintech companies. And here’s why, at Intrinio, we’ve made financial data easier and more affordable for anyone that wants to innovate or build on top of the data. Websites, dashboards, algorithms, you name it. Historically, this meant that our client base was full of fintech companies like RobinHood, Domain Money, FTX, MarketBeat, and Alpaca. However, over the past year, we’ve seen an influx of larger, more traditional companies like asset management firms, banks, brokerage platforms, and hedge funds come to us looking for data.
They are stepping away from the bloomberg terminal and starting to innovate, they need great developer tools, fast access, and scalable pricing. Side note, the Bloomberg terminal, or Eikon, or Factset software are all incredibly valuable and important tools - they aren’t going anywhere. These workstations are great for analysts who want to look at the data and analyze it, but you can’t build with the data inside these platforms.
In this blog, we are talking about innovating and building tools and platforms organically, outside of the terminal. And there are three major catalysts that jump started innovation inside of financial institutions: Competitive Pressure, Customer Evolution, and Tech Advancement.
Let’s talk about the competition first: Robinhood, Alpaca, IEX, MEMX, Embed, Titan, Realizefi, Coinbase, Betterment and so many more. Robinhood saw the path of lower commissions and decided to head straight to $0 forcing other brokerages to follow suit or lose out. Betterment and WealthFront have proved that users want a streamlined platform where they can grow wealth. Titan’s mission is to allow all investors (not just accredited and wealthy ones) to have access to invest in a hedge-fund, and it’s paying off with $500M in AUM. So, which institutions are feeling the pressure? Brokerage firms, stock exchanges, clearinghouses, and traditional banks have all started to respond.
We’re seeing these firms shoot back at the most basic level by redesigning outdated platforms to get up to speed, but they’ve been a bit hesitant to chop up their existing business models. Some are branching into Crypto to keep up. Fidelity will be allowing 401(k) participants to put money in Bitcoin by the end of 2022 and promised more cryptocurrencies to come.
Others have chosen the M&A route, for example, UBS acquired Wealthfront for 1.4B just this year. While competition is an obvious reason for these larger companies to start behaving like startups, it’s not the only one.
For any business, in any industry, the customers control the narrative and heavily influence strategic direction. If you’ve been paying attention to the investment landscape lately, you’ll notice that this customer base has gone through a complete transformation. Retail trading volume, sophistication, and demand for transparency has exploded. Younger investors, now more than ever, want to see how their companies perform both on the ticker tape and in society. When faced with the prospect of moving their business to a more innovative fintech platform, these customers demand more from their traditional platforms. This is affecting banks and investment firms the most.
We’ve seen these institutions respond with their own mobile apps, adding more sophisticated features to their platforms, redesigning outdated UIs, and increasing transparency and visibility into portfolios through dashboards.
Take a look at Goldman’s Marcus platform, Ally Bank and robo-advisors for some good examples.
The third, and final trend that is molding traditional financial institutions into fintechs is the general advancement of technology. I know, that’s pretty broad, so let’s break it down.
First off, machine learning, natural language processing, and artificial intelligence have reached their “iphone” moment and are now widely and openly available to anyone who is interested. In this space, we see hedge funds transforming into quant funds, fundamental strategies becoming quantamental, ai chat bots for customer support, and much more.
Separately, blockchain applications have swarmed financial services: credit scoring, bills of lading, insurance claim processing, and even stock exchanges which are starting to incorporate blockchain into their infrastructure. Technology has also, in general, enabled faster and wider collection of valuable data sets, magnifying the never-ending search for alpha.
This has shepherded in the “data economy” and the proliferation of “data marketplaces”, which, in particular, have become a popular business model that many traditional stock exchanges are bolting on to diversify and hedge. In all three of these cases, financial services firms are leveling up their tech talent, tech platforms, and massively improving their ability to source, consume, control, and make use of massive amounts of data. Essentially, things are changing inside financial institutions, due to competitive pressures, customer evolution, and tech advancement.
This confluence of trends has financial institutions under pressure to innovate, just like startups do. Small projects pop up inside the firm and start moving quickly, outside of the traditional corporate bounds. These teams are under pressure to innovate and build fast, with the latest and best technology and data, without spending a lot of money. They’ve got to prove it to their bosses that there’s reward behind the risk and spend as they rush to catch up. Think of it as mini startups within a big company.
Ok, but what happens when an institution behaves like a fintech? The first, and most palpable effect, is a culture clash. Spend a day in a startup office and you’ll see what I mean. Problem solving and radical innovation are not the same thing. Rocking the boat is required, but culturally terrifying for institutional employees. There’s also a speed clash, which requires traditional conservatism to be upended by less planning, risk aversion, and resource hoarding.
This all boils down to a risk mismatch - the bigger a company gets, the less risks it takes. But, if you are trying to keep up with fintech, you just have to, and it is wildly uncomfortable for those that aren’t used to it. Lastly, there’s this complete upheaval of traditional processes. You can’t spend months building a project plan and gantt chart or waiting for approval from seven layers of management if you are going to try to compete with RobinHood.
There are cases, of course, where institutions stand their ground. In Hamilton Helmer’s book “7 Powers, the Foundation of Business Strategy” he explains counter positioning: This is what happens when a newcomer adopts a new, superior business model which the incumbent does not mimic due to anticipated damage to their existing business. Some say evolve or die, but there are plenty of companies who have successfully held the line, like Bloomberg, for example.
One downstream effect of all of this change has been the sheer amount of tech and platforms that institutions have had to adopt to support the new innovation surge. To behave like a startup or a fintech company and truly innovate, these institutions need cloud technologies like AWS, better collaboration tools like Slack, modern UIs, and more. In the capital markets space, they’re also reconsidering their data providers. Data is a wildly important factor in a fintech project. Unfortunately, the data infrastructure and business models of traditional vendors (which institutions are used to) do not support innovative use cases. In this case, forcing a square peg into a round hole can be particularly catastrophic. Here’s what the traditional data procurement process often looks like with large vendors that these financial institutions are used to: That’s just not going to work for modern developers, innovators, and data scientists.
Platforms like Intrinio are an oasis for innovators inside of these larger firms, and that’s exactly why we’ve noticed the acceleration of financial institutions behaving like fintechs. Reach out to one of our data experts today for more information on our packages and financial data. And thanks for reading and as we always like to say at Intrinio, we can’t wait to see what you build with this data.