It seems that increasingly, some FX firms want to adopt the business models deployed so successfully by the large technology giants that have emerged from Silicon Valley.
Banks talk about developing their single-dealer platforms to mimic the Amazon model of being able to supply everything that their customer needs within one platform.
At least one trading venue is talking about moving to the Facebook model of charging nothing for the actual technology platform that it provides, because it will instead derive profits from the data generated by that platform.
Another fintech that is developing credit solutions is looking to adopt the Airbnb model, providing technology that matches up people who have excess credit with those that need it.
Can FX firms really learn from Silicon Valley business models? Or are these comparisons really gimmicks designed to paint their technology solutions in a favourable light?
“Look, there are plenty of lessons to be learnt from Silicon Valley if somebody really wants to learn those lessons,” said Vikas Shah, managing director, investment banking, at Rosenblatt Securities, on a recent Profit & Loss webinar.
He continued: “What drives Silicon Valley, and what they deliver better than most industries across the spectrum, is really what we call user experience. People go back to the Apple or Amazon or Airbnb [examples] simply because they provide this seamless experience. So, if you want to learn one thing from Silicon Valley, it is how to deliver that seamless user experience.”
Shah did note, however, that some of the business models employed by the big Silicon Valley firms have not proven to be so readily implementable and successful in financial services. For example, he pointed out that Facebook went through several years with no profits and yet could build enough capital to keep investing in the business without being pressured for a dollar return on that capital. Shah said that he has yet to see this model be replicated in financial services.
The other issue highlighted by Shah is the difference between servicing individual customers versus institutional customers. Building a Facebook-like business, he explained, requires enormous investment and the cost of customer acquisition is incredibly high, but it can actually be built relatively quickly provided that the firm has access to a lot of capital.
By contrast, Shah added: “The institutional businesses are very slow to build. It takes a long time because you’re dealing with institutions that are regulated and it’s not easy for a bank, broker-dealers and platforms to move that quickly, because they have reporting requirements and they have all kinds of capital constraints that they have to deal with.”
Stuart Crooks, director, FX business development, EMEA, at IHS Markit, said that the key thing to look at when considering if financial services firms could replicate Silicon Valley businesses is the platform-as-a-service model.
“Look at some of the things that we use today – I use Netflix, I log in and I don’t necessarily know that the back-end service is actually sitting in Amazon. If we can’t move to a platform-as-a-service, or a PaaS, model in financial services, I don’t think we’ll be able to adopt innovative technologies,” he said.
Following on from this, Crooks cited an article that stated that in the US alone, 43% of all banking systems are still written in COBOL, a programming language that was written nearly 60 years ago. That’s why, he said, if the financial services industry wants to really embrace innovation, it’s going to require commitments and collaboration at all levels of institutions towards change.
Pressed on why such a change hasn’t already occurred, Crooks responded: “You have a stereo system at home, every time you add a new component it looks fine from the front, but if you turn around the back, there’s another cable that intertwines and another cable which goes between another cable. So what you’ve got there is a legacy system or systems.”
He added: “It will take time, I think in 2018 we’ll see some movements in this space, especially when it comes to things like shared infrastructure, but at the same time, it needs full adoption from everyone across the business.”
Isaac Lieberman, CEO of Aston Capital Management, agreed with Crooks about the challenges associated with legacy infrastructure and technology, suggesting this is why innovation really needs to be driven by newer firms in the market that are building their technology from the ground up and can therefore deploy the latest innovative technologies, software and architecture available to ensure that everything is scalable and adaptable.
“Now the goal should be that, as we develop these technologies, we use them for principal trading to provide returns for investors. But ultimately, what we would like to see is the sharing of these technologies too,” said Lieberman.
If this scenario comes to pass, he pointed at established players in the market with legacy infrastructure and technology in place that could subscribe to the new technology available and eventually leverage it to further scale their own existing businesses.
“They could learn how to integrate it into their world. It could almost be like they build a parallel universe with the legacy on one side and the new on the other, and then kind of build out on the new until it can ultimately replace the legacy. That’s the way I could see this evolution really having a powerful impact,” Lieberman concluded.
As a result, he claimed that the fintech firms that will really drive innovation in FX are going to be the principal risk trading firms that will develop and license this technology through a subscription to other market participants. And at this point, once again, the analogy to Silicon Valley came into play.
“If you look at examples of big technology firms – Google, Facebook, AirBnB, Apple – they’re large firms that are adaptive and agile that have lots of capital to deploy in building out principal technologies, but then they really scale and grow by distributing it out to other users who might not have the same in-house resources but can become clients and consumers of the technologies developed,” said Lieberman.
A full recording of the webinar can be accessed here.