Big tech companies such as Amazon, Apple and Google have enormous capabilities to deal with individual consumers and process vast amounts of information. They have already transformed consumer purchases and payments, and they appear to be on the cusp of a broader expansion into consumer finance – potentially disrupting consumer banking and shifting the landscape for technology providers in that space.
Will big tech disruption in the consumer space impact the institutional markets? It’s already having an impact, but in different ways – some of them positive.
First, direct competition with institutional players will be tough. Data complexity is a real barrier to entry. Consumer giants have massive amounts of relatively simple data about individual consumers. By contrast, capital markets represent smaller volumes of data but a significantly more complex business that includes:
- A web of interrelated buy-side and sell-side firms
- An ever-evolving range of products with long transaction lifecycles
- Intricate account relationships, portfolio and fund structures
- A web of interrelated buy-side and sell-side firms
- Multiple execution and clearing mechanisms
- Complex and varied accounting and regulatory reporting rules
Of course, individual finance and payments isn’t a simple business. But the operations and technology required to support the institutional world is significantly more complicated. No barrier is insuperable, but it raises the cost and slows the process for would-be competitors. We may find that big tech only wants to go so far in capital markets. In short, they may not be the immediate and obvious threat to capital markets that they are in retail finance.
That said, big tech firms are transforming expectations for user experience and data access – a digital transformation. Consumers now expect their experience to be easy and seamless. And institutional users are also consumers, so they have come to expect instant access to comprehensive, detailed information in whatever format they want, wherever they are, on whatever device they are using.
But there’s an extra hurdle to achieve digital transformation in the institutional space. It requires the same seamless user experience, but underneath are layers of infrastructure and systems to manage and assemble information from the complex web mentioned earlier. This applies to portfolio management, risk, order management and execution, as well as investor and regulatory reporting information. An ergonomic interface is only useful if you’re looking at all the right data, in the right state, at the right time.
Can institutional players achieve this? The piece parts are in place. Numbers are right. Lifecycle events happen. The values are adjusted. Mutual funds post their net asset values at the end of the working day across tens of millions of positions. Investors and regulators get their reports.
The challenge of digital transformation is to assemble and transform all of this to deliver more value to customers and other stakeholders. And this is clearly a positive impact on the industry. We’ve found firms that are succeeding at digital transformation are growing noticeable faster than the rest of the industry.
The other positive disruption of big tech is on infrastructure. They have massive computing power, can spin up and shut down environments easily and quickly in response to fluctuations in demand and are investing at scale in cybersecurity. By providing these capabilities to the wider world through the public cloud, they are arguably increasing overall efficiency for other technology firms.
Big tech is having a huge impact – competitive but also transformative. And they are smart and can move fast, so they’re valuable to watch in general. Those of us in capital markets should keep our eyes open even when they’re not a direct threat.
