FinTech and Consolidation in the Capital Markets

The forces of globalisation and technological innovation have transformed the securities trading industry. One of the ways we are seeing the capital markets community respond to these and other associated competitive pressures is through the process of consolidation. 

The recent history of the London Stock Exchange Group (LSEG) is a good example of this. In 2007 the London Stock Exchange merged with Borsa Italiana, before acquiring MillenniumIT and becoming a majority stakeholder in Turquoise in 2009. Two years later, the LSEG signed a strategic partnership with the Mongolian Stock Exchange and bought the remaining stakes in FTSE International Ltd. Then in 2013, the LSEG bought up technology firm Gatelab and launched a joint Fixed Income venture with TMX Group, before acquiring Frank Russell the following year.

This consolidation of financial institutions is being driven by attempts to exploit economies of scale and scope. 

How FinTech is sparking a revolution in the City

Investment banks that comprise of many different branches, by nature comprise of many different systems all with their own technologies. If these are managed in-house, the business as a whole suffers, becoming less flexible and slower to adapt to changing markets. Costs also rise due to the time and resources spent directing and updating multiple systems.

The latest CBI/ PwC Financial Services Survey found that, in the next twelve months 75 per cent of financial institutions are going to increase spending on IT and the overwhelming majority (85 per cent) of these cited 'efficiency' as the reason why. 

Financial Technology (FinTech) firms might have started on the outside looking in, but as large institutions look to combat the problems that are rendering them slow to react to the marketplace, FinTech has become firmly embedded in the everyday landscape of the financial markets. The outsourcing trend is shaking up the way that financial institutions run their IT operations and it has been nothing short of revolutionary within the financial industry. 

What is changing for FinTech? 

Regulators have so far been intent on changing the banks, but following the significance and speed of their rise, FinTech firms have been catching their attention. Regulators are beginning to stipulate that third-party vendors to banks, such as FinTech firms, provide proof of their financial stability and their capacity to roll with the punches so that the banks do not suffer unnecessary losses should things go wrong. 

FinTech firms tend to be small, nimble start-ups, which is often a major sticking point for the watchdogs and consequently the banks entrusting their projects to these firms. To offset this, FinTech has started its own mini-consolidation wave - many of the big financial institutions and exchanges are buying up FinTech groups, absorbing their technology, practises and cultures. In exchange these institutions are giving FinTech firms their protection, security and opportunity that comes with being part of a big organisation. 

Besides meeting the needs of regulation, this allows FinTech firms to scale much quicker, a key benefit in light of how fast demand is closing in on supply for FinTech.

It is these drivers which last week lead to the announcement that Computer Sciences Corporation (CSC) has agreed in principle to acquire Fixnetix, with the dealing closing in the fourth quarter of this year. Fixnetix has enjoyed enormous success over the last ten years, evolving its services and solutions until it has become a leading managed service provider to the global financial community. The acquisition by CSC marks the next significant stage in the development of Fixnetix. As Hugh Hughes, CEO of Fixnetix, commented "we will gain the resources that we need to better respond to market demand, effectively address bigger deployments, and build on our established success. CSC's proven at-scale reputation to deliver across all industries will fundamentally bring greater credibility and presence to Fixnetix."

Looking ahead it would seem that the wave of consolidation within FinTech and the financial industry in general is set to continue. Two high profile FinTech acquisitions have been announced since Fixnetix, whilst the industry trend of investment institutions outsourcing technology services shows no sign of slowing down. If anything this trend is set to increase, and when it does the position that Fixnetix will be in following acquisition is a strong one.