08:40 AM
Greg MacSweeney
Greg MacSweeney
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Capital Markets Innovation Is Bogus

Every financial technology executive talks about innovation, but few actually practice it.

When I was discussing innovation with a couple of senior business leaders from a Boston-based investment company, the word one of them used to describe innovation on Wall Street wasn’t "bogus" as the headline states, but a different "B" word. I’m sure you can imagine what that word is, but the point is the same: There is little technology innovation happening in the capital markets.

At Wall Street & Technology, our editors are regularly approached by companies looking to talk about their latest innovations. Nine times out of 10, the supposed innovation isn’t innovative at all. Often, it’s just a slight improvement on an existing technology, or perhaps a new strategy at the bank. Offering a retirement calculator to 401(k) account holders isn’t innovative. Rolling out the latest version of your mobile app isn’t innovative either.

Similarly, shaving a couple of nanoseconds off of your trading system’s latency isn’t innovative either, unless you are deploying a completely new technology or relying on some sort of laser beam that zaps data at the speed of light. (I joke about that now, but in a few years, who knows?)

There are a number of reasons why innovation has left Wall Street. The deep financial crisis left many large financial firms wounded, both on their balance sheets and in their mindsets. "The psychological impact of the crisis on the financial industry should not be underestimated," says Karl Antle, managing partner at ValueStream Labs, a firm that helps connect entrepreneurs, investors, and financial services professionals. "The banks were permanent fixtures in the economy that suddenly had to take bailout money to stay in business."

The resulting mindset that settled over the industry, not to mention the drastic budget cuts, had most managers and leaders trying to find ways to reduce risk, not develop innovative technology or products. More than five years after the September 2008 collapse of Lehman Brothers and the start of the financial crisis, the clouds over the industry are just starting to part.

Perhaps a larger obstacle to innovation in the capital markets, however, is the compliance organization at most financial firms. Most large financial institutions require any new technology or service provider to meet stringent compliance requirements even before allowing the business to get a chance to consider the value of a service or technology. How can a business leader even entertain a new way of doing things through technology if he isn’t even allowed to meet with a potential vendor?

"Wall Street stifles innovation at every turn," Antle continues. "Compliance often leads the decision process." And, after all, what does compliance know about innovation? "The sell side, especially, has not changed its way of thinking when it comes to startups," and often excludes them when they search for new technology because they are deemed as too risky, he adds.

Even the shared workspaces where many new companies are starting would simply be considered too risky for most banks. The open floor plans, tables as desks, lounges, couches, and communal work areas are rarely, if ever, found at a bank.

The buy side, however, has started to embrace the startups, as they are looking for new technology to supplement the existing tools that are provided by the established sell-side shops. “The brokers still have development groups sitting far away from the business units, so it is hard to have good communication with the technology teams,” a former senior technologist at a New York-headquartered brokerage firm told me over coffee recently. True, there are exceptions, but many development groups are located in Jersey City or Princeton while their business counterparts remain in New York City.

As a result, many frustrated financial services workers have left the industry in the past couple of years to launch their own startups that focus on specific problems in the financial industry. Although specific numbers are hard to come by, there are definitely many hundreds of new fintech startups in New York, Boston, and Chicago alone. Some startups are nothing more than a couple of people with a good idea, while others have a good business plan and are even gaining financial backers.

[FinTech start-ups are popping up all over Manhattan. To see ValueStream's midtown co-working space, visit: Inside the NYC FinTech Startup Scene.]

Across Manhattan, co-working spaces are sprouting up where startups are flourishing. Many are solving real technology and business problems, gaining investors and finding ways to succeed despite the reluctance of many established Wall Street firms to work with startups. Many are focused on data analytics or big data solutions for financial services, in addition to mobile offerings.

Hopefully, the fintech startup scene will help breathe some life into an industry that was once on the cutting edge of speed and data analytics. Wall Street & Technology will be taking a look at a number of these newer companies during the next few months in our "Entrepreneur In Focus" series.

Our first Entrepreneur In Focus is a company called Better, which is taking direct aim at MDM player Good. Here's the article: Better Takes on Good's Mobile Security Solutions.

Take a look and let me know what you think. Does Wall Street need an innovation jolt, and can newer entrants to the fintech scene make it happen?

Greg MacSweeney is editorial director of InformationWeek Financial Services, whose brands include Wall Street & Technology, Bank Systems & Technology, Advanced Trading, and Insurance & Technology. View Full Bio
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Steve Wiesner
Steve Wiesner,
User Rank: Apprentice
5/30/2014 | 3:24:11 PM
Innovation Drives Better Transaction Outcomes
Hey Greg,

This is a very thoughtful and interesting article.  

Having spent twenty years in investment banking and private equity – including time at large bulge bracket firms – I've certainly seen this mindset in action.  The bureaucracy can be stifling and compliance issues can impede the adoption of great new technologies.        

Fortunately, I don't think that's the case across the board.  We sell primarily to M&A bankers and we've seen a high level of receptivity to innovative new products from bankers themselves.  Progressive investment bankers are realizing a few things.  First, the deal processes they run are becoming more commoditized.  Second, new boutique firms pop up every day and competition is brutal.  Third, anything they can do to differentiate themselves and their deals can have a huge impact on winning a new mandate, closing on a large fee and pocketing a big bonus at the end of the year.  At Peloton, we've had bankers at bulge bracket and middle market firms alike use our product even though we haven't jumped through all their compliance hoops yet.  Their sole concern is that the product allows them to make more money for the firm.  They are key drivers of adoption.

Innovation will always win in the end.  Excel killed Lotus and became the industry standard for analyzing and structuring deals.  Merrill and Intralinks killed the physical data room and became the industry standard for the diligence phase of the process.  Peloton is killing the PDF and hard copy offering memo and will become the industry standard for the marketing stage of M&A and financing deals.  The sale cycle is long; the banks are conservative; but the competitive realities of the industry will ultimately drive innovation in the space.
User Rank: Apprentice
5/23/2014 | 10:27:20 AM
What is your definition of innovation?

Innovation - the introduction of something new; a new idea, method, or device ; In technology, an improvement to something already existing.

Based on the current english definition of what an innovation is, it seems that the facts will have to disagree with your article and your opinion.

Maybe you are referring to INVENTION rather than innovation?

The ability to reduce latency by .0001 nanoseconds is an innovation. Just as seatbelts were an innovation to help protect our drivers, so is new risk standards and implementation of compliance regulations. These new innovative standards help to protect our markets, our accounts, and our lifestyles.

I think you are reducing the value to of the idea of innovation by increasings its weight to something that is so life changing that it has never been heard of. That is in fact called an invention.

Everyday our financial technology engineers develop solutions to issues that have never existed before. When a IT developer gets a call from a trader that he needs an order routed based on a new criteria to several different venues; the developer now has to draw up some code in JAVA, C, or XML to design this new strategy. That in itself is innovation.

Every single day our financial industrys developers, scripters, production support, database managers, and network engineers use their talents consistently to solve problems using innovative new approaches which is what drives our technology forward.

Even in the current state of our markets we are met with innovative ways to reduce transaction costs, save money on new technology, and find new ways and routes to execute investment vehicles - all of which are innovations.

Maybe adding 10% to your cellphone battery power is not considered an innovation to ones gameplay time or time on Skype but it could very well be an considered an innovation to another industry where battery life translates to the ability to help people or save their lives such as the medical industry in an ambulance where even 1% battery life on a technology could mean the balance between life and death.

There are many boundaries that are drawn throughout technology, such as the modem. The modem went through various phases of innovation from a 1200 baud modem to 14.4 baud modem. from anyone using high speed internet to sending a simple fax that innovation means nothing. But to those transferring data globally that little increment of technological speed from 1200 to 2400 baud modems is a life changing innovation.

I salute all the technology personel, investors, business analysts that work hard everyday to innovate new ways to develop solutions and make our customers happy.


Greg MacSweeney
Greg MacSweeney,
User Rank: Author
5/23/2014 | 10:05:12 AM
Re: the challenge of innovation in FS
Yes, the sales cycle at most financial firms takes forever. Apparently, if someone wants to 'fast track' a project's approval, the sales cycle can be shortened to 5 or 6 months, or so i've been told. 6 months is considered 'fast'? Crazy.

And at many FIs, the avg sales cycle is usually 12-18 months.
User Rank: Apprentice
5/23/2014 | 5:18:21 AM
Re: the challenge of innovation in FS
I certainly agree that compliance has a significant slowing effect, but there are others. One of the hardest parts of selling to financial services I've found is the perception of time.

As a start-up every day counts, and I can move so fast that a lot happens in a day. In a bank, a week or even a month is no time at all, decisions take forever and sales cycles (for software at least) become crazy long.

No wonder software in financial servcies is so expensive, and why so many start-ups run out of money before they get many clients.
Greg MacSweeney
Greg MacSweeney,
User Rank: Author
5/22/2014 | 4:57:55 PM
Re: Perhaps the term innovation is overused
I couldn't agree more. "My phone's battery life is 10% longer. What an innovation!!" whatever...
Nathan Golia
Nathan Golia,
User Rank: Author
5/22/2014 | 4:50:50 PM
Perhaps the term innovation is overused
By breathless banks and techology companies that want to divert th negative attention from the sector. How often did true innovations really come along, historically? I'm sure it was every 5 years to a decade or so, with incremental improvements until the next big breakthrough. Trouble is, now everyone is treating the incremental improvements as the breakthrough.
User Rank: Author
5/22/2014 | 12:59:33 PM
Chilling effect
Your point about the chilling effect of compliance on innovation I think is true -- but I think it's a challenge and also a bit of a canard. That is, compliance concerns can be used by senior management/business leaders as an excuse for not making the investments and culture changes needed to drive real innovation and transformation. Almost a self-fulling prophecy kind of thing. Also, we should keep in mind that almost any time there is a high-profile corporate/industry failure, innovation becomes a dirty word. Think about Enron -- their approach to energy trading was deemed highly innovative -- until it brought the company down. Obviously whatever true innovations Enron created became abused and misused, but still. Innovation should not be seen as synonymous with risk, but inevitably that happens in the wake of problems, and no doubt that is part of the problem in capital markets now. After all, even insurance companies are creating innovation labs! If insurers are pursuing innovation, it can't  be that risky!
User Rank: Author
5/22/2014 | 12:44:46 PM
the challenge of innovation in FS
There seems to be a challenge in defining innovation across financial services. As you point out, small improvements on existing technologies - while good - don't really count as true innovation. Larger firms are reluctant to work with startups, but with the right match I think such partnerships could prove beneficial to both parties. The startup would gain the finances and support to grow while the larger business gets ahead with a new mobile or analytics solution. 
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