EY report “Capital Markets; innovation and FinTech”

EY report finds collaboration with FinTech key to the long term success of investment banking

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  • Innovation is critical for long term growth opportunities to be seized
  • FinTechs and strong ecosystems can fast track innovation
  • Long term winners are engaging to drive agility and lower structural costs
  • Swiss FinTech investements grew by 50% to CHF 130 million in 2015

Zurich, 27 September 2016 – Investment banks that embrace innovation and collaboration could find numerous opportunities to grow, optimize, protect and control their businesses in ways that were previously not possible. This is according to a new report by EY and financial technology organization Innovate Finance, Capital Markets; innovation and the FinTech landscape*.

“In Switzerland, investment into FinTech start-ups grew by 50% to CHF 130 million in 2015 vs. CHF 86 million in 2014. In comparison, 550 million CHF were invested into FinTech start-ups the UK, in the same period. While early stage investment is available in Switzerland, we are lacking venture capital investments into FinTech start-ups, mostly due to our risk-averse investment culture,” says Stéphane Muller, Head of Financial Services of EY Switzerland Romandie.

The report highlights how, in an environment of declining return on equity (ROE) for investment banks, greater collaboration with FinTech companies could help banks improve their approach to market and halt declining return on equity revenues. Investment banking revenues fell by almost 4% in 2015 compared to 2014, with average ROE for the top 14 global investment banks sliding from 7.8% in 2014 to 6.3% in 2015. Typical cost of equity for an investment bank would be between 10-12%.

The report identifies the best near term opportunities to be in areas such as Robotic Process Automation (RPA), advanced analytics, digital transformation and the outsourcing of processes and services. Respondents believed that technologies such as Artificial Intelligence (AI), Smart Contracts relying on Blockchain could be game changers in the longer term, but will take longer to deliver returns on investment. The report also cites how partnerships between FinTechs and investment banks can help to reduce structural and operational costs, enhance regulatory compliance, support the innovation of products and services, and ultimately deliver better value to shareholders.

David Williams, EY Capital Markets Innovation Leader, says: “This report highlights the opportunity for FinTechs and capital markets firms to work more closely together. There is no shortage of innovative ideas out there – many of which have become much more feasible thanks to the technology now available.

“FinTech’s advances into retail financial services are well documented, but the opportunity for collaboration with capital markets firms is growing fast. Increasingly, investment banks are recognizing the need to collaborate with the FinTech industry, benefiting from the fresh thinking and new technology that comes with it, with the added advantage that much of the research and development has been funded externally.”

In an environment where investment banks continue to address major challenges such as structural costs, regulatory reform, conduct issues and capital requirements, innovation has been less of a priority in recent years, according to respondents. However, the industry now finds itself at a cross-roads where innovation is critical to seize the opportunities ahead, while today’s challenges show no sign of easing.

At the same time, the pace of change is unrelenting. While offering ever more opportunities for entrepreneurial growth, changing demographics result in more end users of financial services to serve, and trade becomes increasingly global. Against this backdrop, the core purpose of investment banks – to flow capital to the real economy, facilitate trade and manage risk – continue to be valid.

Imran Gulamhuseinwala, EY Global FinTech Leader, says: “While there is no shortage of willingness to engage between Investment Banks and FinTech firms, there are practical challenges of getting ideas out of the lab and into production. FinTech organizations are still maturing in how they deal with large, complex Investment Banks. For their part, investment banks need a top-down culture that supports innovation, accepting that there is no such thing as a risk-free bet.”

Lawrence Wintermeyer, CEO of Innovative Finance, says: “Many investment banks are collaborating with FinTech innovators and partners to better explore how to improve their businesses. This is encouraging, and we believe we will see wider participation taking place in the FinTech landscape as banks seek to exploit some of the new game changing technologies emerging. The cost of investing in collaboration is low relative to the risk of falling behind technology deployments emerging across the wider investment banking FinTech landscape.”

The report also notes that regulators are becoming increasingly supportive of FinTech solutions to investment banking problems, while also becoming more globally connected themselves through regulatory bridges, for example between the UK, Singapore and Australia.

Williams says: “For investment banks, game changing innovation is no longer optional but is imperative. Banks can’t change overnight, but decisions taken now will go a long way in determining the future. We expect the investment bank of the future to look markedly different to today – we think that the winners could be those that create the smartest ecosystems.”

For more information about the research and to view the full report, please visit www.ey.com/capitalmarketsfintech from the 27 September.

Notes to editors

*The analysis and recommendations expressed in this report were produced by EY, and informed and shaped by more than 40 stakeholder interviews conducted with investment banks, FinTech firms, regulators and venture capitalists across the globe.


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