What is the new ‘normal’ operating environment for enterprise fintech?
Given the times we find ourselves in, I thought it might be helpful to put digits to keyboard to share some of the things we are seeing and hearing across the financial services software landscape since the dreaded C turned up.
Crises in financial markets are nothing new…
In times of crisis, this time being no exception, our reliance on financial technology in markets only goes up with trading volumes as the world adjusts. To highlight a few examples of how significant these moves can be, NASDAQ’s trading volumes are up as much as double and bond e-trading venues Tradeweb and MarketAxess have reported average daily volume increasing near 50% YoY.
Our reliance on the systems and technology powering major financial markets players is testing the resilience of ‘run the firm’ operations well beyond market norms. What is always telling when we emerge at the other end, is the extent of the gulf between the institutions who have invested in ‘improve the firm’ projects to enhance data accuracy, improve access and analytics and those that have not.
… but this time around, the new environment will exacerbate this more than ever
On top of the shifting technology transformations, we add on the largest mass migration of global workforces ever seen. Top shelf business continuity plans have been dusted off and leaned on like never before. These plans, often established to deal with disasters in one city or geography, are being pushed to the limit.
This is probably the largest corporate logistics project of all time globally and within each firm and is no easy undertaking. Firms have had to enact these plans for sizable groups, in multiple locations, in a short time frame, all at once.
Both at the corporate or individual level, we are all still adapting to this new working norm. This comes with new cultural quirks, nuances and an adjustment to communicate styles… not to mention having to juggle families on top!
How are the financial institutions going about ‘business as new normal?’
Banks, asset managers and major financial institutions are at different stages of remote working and resilience so results are varied across the street. Some financial firms have 100% of workers remotely at this point. Others, including numerous global tier one banks, have traders and other ‘essential staff’ still going into offices. Many are still sitting on trading floors in what must be quite close proximity to each other. IT staff also have to maintain ‘on-prem’ systems which, as the name suggests, cannot be managed from home easily. As continuity of businesses settle into the new normal, attention turns to how to do business in the new economic environment.
Never waste a crisis… using Covid as a catalyst for change
The Who’s Who in the consultancy world, including Gartner, have indicated how COVID-19 will be a catalyst for greater attention on to digitisation. Thought provoking commentary from John Lehr highlight how the 2008 crisis saw Morgan Stanley upping their game in tech as a number of banks did. We would agree with these sentiments and the broader trend, but a mixed picture is emerging at this stage.
In a recent call we held with 30+ stakeholders at our partner institutions, 1/3 felt optimistic and 2/3 pessimistic about the economic impact of the current crisis. 1/3 felt a six month timeline was the likely recovery time frame with 61% thinking it would be 12 months or more.
Digitisation, digitisation, digitisation
Against this backdrop, we see digitisation becoming much more of a priority for all enterprises, including financial services. This will be less about stakeholder communication following a few years of one press release after another touting the use of AI within the firm. For years there has been talk of a move towards flexible and remote working. To date, start-ups have engaged with the trend more radically than enterprise, but the current environment is proving that all organisations can cope (to varying degrees) with their staff at home. We anticipate this becomes even more prevalent when we return to ‘normal’. Commercial real estate strategies will likely be reassessed by all firms, large and small.
What the environment has highlighted, is that processes which require human to human interactions are more difficult and vulnerable. Processes and workflows that are human to computer or computer to computer stand up better under the current state.
Many firms are going through a period of rationalisation of what to do next in the new economic climate. With internal resource constraints and time to market being even more critical, we expect external vendors will be leveraged more than ever — even for the firms that have historically like to build in-house.
As with anything, they will focus in on priority areas — some projects to be accelerated, some will continue at the same pace and others will be cancelled. With nearly all enterprises under pressure in the near to medium term, financial institutions will have to double down on existing business strengths and exit businesses which are not performing. Peer comparisons of winners and losers will be scrutinised carefully by shareholders and other stakeholders. M&A will likely be a requirement to consider for numerous financial services firms to remain competitive.
Prioritisation is only going to get more pronounced for assessing software buyers. When times are good, perhaps they can entertain ‘nice to have’ projects. Not now. Individuals in charge of finding and buying solutions fit for purpose already receive 100s of emails a week from software vendors telling them why they must have their solution. We know this process of filtering and selection was challenging before as we work with our industry partners on it. Up to date vendor knowledge, understanding of buyers problems, which vendors are robust enough to deal with second and third tier counterparty risks in this environment, are all topics that become a priority. Couple this with how critical good relationships, communications and processes are between business units, technology groups, procurement, management and innovation departments will be leaned on more than before.
So who stands to benefit?
Our recent discussions lead us to believe that this environment will significantly benefit some while others will need to rethink their enterprise offerings and approach. Solutions that can create the greatest cost savings, will have a significant impact, are a ‘must have’ not a ‘nice to have’ will succeed.
Workflow automation, particularly for the most manual of tasks that involve multiple people in the communication chain, will likely see an acceleration of projects. Cultural change in these areas is often the hardest lift so needed a large catalyst.
This is nicely highlighted by Matthew Cheung in his recent post on the topic. Swivel chair syndrome doesn’t work when someone moves from five or six screens on a trading floor to one or two at home. Solutions like Finsemble (note we are an investor) fit nicely into this bucket with their automating workflow links into Bloomberg, Symphony and other major fintech vendors.
Migration to cloud projects will undoubtedly be expedited. This links heavily into data management and analytics projects that impact the whole of the trade life cycle — pre-trade through to post trade.
Post trade efficiency, cost and participant interaction which has always rumbled along in the background as an industry focus will have as great an impetus now as ever to address the ‘but why now’ question and shift meaningfully forward.
But will they even be able to sell if they can’t meet buyers?
A broader challenge for vendors becomes how they manage the remote selling of enterprise software. Direct sales have always been led by relationships. Building and maintaining trust between key decision makers, or negotiating multi-year million-dollar contracts when you cannot meet face to face is something few have experience in.
Adjustments will need to be made within vendors to building and executing on sales pipelines. Vendors will have to navigate an organisation virtually and increase collective buy-in for their products. Understanding key decision makers, understanding firm level politics and the ability to ‘read the room’ when physical meeting are less regular or not at all makes for new dynamics in selling. Demonstrating a solutions quantitative ROI to key buyers and stakeholders beyond the qualitative offer has never been more linked to success.
Overall, we see a net positive for enterprise fintech and software where start-ups can navigate to the new operating environment effectively, articulate their significant value add and stay alive!
In my next post I will discuss how our portfolio companies are addressing the new normal after a period of flying first and communicating second.
