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Sang Lee
Sang Lee
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The Next Wave of Innovation in Capital Markets Technology

Post financial crisis, most banks have been focusing on survival rather than innovation. That's changing, however, as more technology startups are entering the financial services scene.

After five years of stagnant growth and a constant struggle for IT budget, the number of startups looking to present the next wave of technological innovation in capital markets has exploded during the past 12 to 18 months.

There are many different types of vendors and services providers that represent the next generation of capital markets innovation. Some focus on offering unique datasets, while others are interested in new business or operational models. At the highest level, a lot of firms out there are focused on the following areas of innovation:

  • Data, data, and more data. With electronic trading infrastructure deemed fairly commoditized, an increasing number of firms are now attempting to differentiate through unique sets of nontraditional data. In essence, the market seems to be entering a new age of alpha generation driven by data rather than speed.
  • Social media. Closely tied to the ascendance of data, a lot of firms are leveraging social media, not only to analyze social media feeds, but also to create private communities that can interact to improve their overall products and services.
  • Big data and analytics. Big data has moved from buzzword to table stakes for startups attempting to marry varied data sources and sophisticated analytics to provide investment firms with usable information.
  • Living on a cloud. Most of these new vendors are looking at a minimum footprint at client sites and also seeking cost-effective ways of hosting and delivering their services, all via the cloud.
  • The innovative business model. Most of the startups in this report are still considering legitimate revenue models while offering viable free content to attract interest from the rest of the industry. More mature firms have implemented a pay-as-you-go, subscription-based business model delivered via the cloud.

Here is a sampling of a few of the newest innovators in financial services:

While a lot of excitement surrounds these market entrants, they face many challenges, and odds are still against most of the players' long-term success. Some of the more obvious challenges include the following:

  • Finding a revenue model. Most startups succeed in attracting market interest and traffic but fail to discover and implement a realistic revenue model to develop a legitimate business. Finding a viable revenue model is key to success in today's uncertain market environment.
  • Fueling copycats. There is always danger of unique ideas being copied by large, incumbent competition looking to take advantage of cash-strapped startups' market innovation.
  • Committing to growth. While 2014 appears to be the year for market participants to emerge from their short-term maintenance mode to invest in future growth, nothing is etched in stone. Lack of industry commitment to growth in the near future may doom the success of these smaller players.
  • Working through a weakened ecosystem. In the past, a host of large vendors and service providers provided a robust ecosystem that embraced startup innovation via funding or acquisition, but recent market stagnation has substantially weakened industry nurturing of smaller, innovative vendors.

Still, after years of stagnation, we are beginning to see recommitment by the industry to innovation, and I expect to see more competition to come as startups fight for the future of Wall Street 2.0.

Sang Lee is a co-founder and managing partner of Aite Group. His expertise lies in the securities and investments vertical, and he has advised many global financial institutions, software and hardware vendors, and professional services firms in sell-side and buy-side ... View Full Bio
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Kelly22
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Kelly22,
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5/30/2014 | 4:53:16 PM
Re: Cautious approach?
I think startups have a higher perceived risk because most haven't really demonstrated success. When choosing a new partner, I'm sure businesses are wary of working with a brand-new startup over a more established company that has proven successful in the past. I'm curious to see how this unfolds with analytics, though, since that's a fairly new territory for both new and established companies. It'll be interesting to hear what the panel has to say.
Becca L
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Becca L,
User Rank: Author
5/30/2014 | 4:29:15 PM
Re: Cautious approach?
Interesting point, Kelly. Companies often invest in full fledge companies and ideas or vendor services that don't end up adding much or any value to the firm, that may turn into a dud. Just the cost of taking risks on new products. Do you think that risk is much more significant with startups? Next week I am moderating a panel on enterprise willingness to work with startups to enhance their data analytics.. I will sure to bring up this question.
Becca L
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Becca L,
User Rank: Author
5/30/2014 | 4:25:58 PM
Re: big banks
Great point! The first question these big companies ask now is, okay, you have a great idea/app/program but how can I smoothly deploy it to my 50,000 employees, give them training and keep it updated? Working these elements into a startup's buisiness plan is increasingly a priority.
Becca L
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Becca L,
User Rank: Author
5/30/2014 | 4:23:25 PM
Re: big banks
There's a rise in incubator programs as well. Big firms are taking these fledgling companies with promising talent and big ideas and shaping them into companies that can handle the demand of the big firms and interact with them in a real way. A lot of VCs are offering training/workshop programs around this too.
Nathan Golia
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Nathan Golia,
User Rank: Author
5/22/2014 | 4:55:03 PM
One company stands out
Genscape is significantly older than the other listed companies and is not located in a traditional "incubator." It's admirable that they're able to stay near the top of such a list considering how many companies are chewed up and spit out.
Kelly22
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Kelly22,
User Rank: Author
5/22/2014 | 3:17:51 PM
Re: Cautious approach?
While it would be good to see partnerships increase, I think a careful approach is necessary for firms working with startups that specialize in new technologies. As you say, those who slip up and place a bad bet could end up farther behind than they were before the partnership. 
KBurger
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KBurger,
User Rank: Author
5/21/2014 | 2:17:48 PM
Cautious approach?
These are all good points. I also feel like this scenario (start ups, etc.) is nothing new. We've seen it before in financial services, for example in 1999-2000, the time of the dot-com boom. New and innovative technologies, whether internet, mobile, big data or whatever -- spur more innovation and also a bandwagon effect. Some succeed and grow, some have a kernel of success but can't sustain growth and end up being acquired by a bigger and more established player, and some flame out -- sometimes unfairly, sometimes deservedly. For banks and FS firms that place the right bets, the payoff (financially and also in terms of reputation) is great. Make the wrong bet, and you lose not only $$$ but also momentum, respect and the will to innovate.
Kelly22
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Kelly22,
User Rank: Author
5/21/2014 | 12:37:10 PM
Re: big banks
While there is more risk involved in working with a startup as opposed to an established provider, some of these new companies could have serious potential to bring positive change to the industry. Going along with Jon's point, it would be good to see some of the bigger firms purchase those startups and help them evolve their ideas. 
Jonathan_Camhi
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Jonathan_Camhi,
User Rank: Author
5/21/2014 | 11:09:00 AM
Re: big banks
I would think that some of these startups will be bought by soem fo the bigger firms though, and those bigger firms will be able to help bring those ideas and solutions to scale.
pudnhead
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pudnhead,
User Rank: Apprentice
5/21/2014 | 8:47:10 AM
big banks

Yes, there are many more financial services technology start-ups popping up. Most seem to be formed by former IT/biz folks from the big firms. Although there are plenty of new tools available, I've only seen a few that are actually enterprise ready. What I mean is, the apps and functionality is great, but the tools aren't ready for a big firm. Plus, the established firms are very wary of start ups. They almost never work with them, and they will settle for technology that is inferior as long as it comes from an established provider. Do you see this changing?

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