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FinTech in FX: As Old As…This Century?

Although FinTech is a buzzword, it is not exactly new to FX – so what are the keys to a successful FinTech venture? Colin Lambert finds out.

That unimpeachable source of all facts – Wikipedia – defines “FinTech” thus: “An economic industry composed of companies that use technology to make financial services more efficient. Financial technology companies are generally startups founded with the purpose of disrupting incumbent financial systems and corporations that rely less on software.”

That being the case it can be argued with some confidence that the FinTech revolution in FX took place around the start of this century when several start up firms sought to automate the dealing process. In their own way, Currenex, FXall and HotspotFX were – are – all FinTechs.

So too are the swathe of firms that sought to automate other parts of the trade process, such as DealHub, Logicscope and Traiana. Just about every retail FX broker using the ‘no dealing desk’ model is a FinTech as are the countless platform providers out there. High frequency trading firms – many of which had their genesis in the metaphorical (sometimes actual) four men in a garage operation? Yep, they’re FinTechs as well.

But to go back to the six companies named above, they all have one thing in common – they have been successful from a FinTech-style start up and none are under their original owners. At various times all have been snapped up by larger firms seeking to exploit the technology and traction each firm had gained.

So FinTech in FX is not new – and it is hard to argue with those who believe FinTech in FX is actually an evolution that started almost 20 years ago (it could be argued almost 30 years ago when in quick succession Reuters rolled out Dealing2000, Matching, followed closely by the launch of EBS).

Most, if not all of those companies named above had the benefit, however, of backing from significant institutions – not just in the form of finance as is the case now when banks invest in FinTech, but in the form of real business. This meant the firms earned dollars and cents from very early on – and they had something of a captive customer base from which to launch operations. It may have been shareholders, it may just have been one big customer that gave the business gravitas or credibility, either way the key was scale – potential or theoretical.

One of the stark differences between that generation of FinTechs and now is sourcing financial backing. “The major change brought about by FinTech is that smart ideas with merit get backing,” says Jon Vollemaere, CEO of R5. “It used to be very difficult to find the capital to get an idea off the ground, usually relying on getting say 10 banks around a table to invest. That is no longer the only route. If FinTech has done one good thing, it has meant easier access to finance.”

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There are, of course, several different flavours of FinTech, from the “four men in a garage” outfit, to a well-funded start up in the city centre – and that was also the case around the turn of the century. 

“When Broadway started in 2003 it was unusual to be a FinTech startup,” says Tyler Moeller, CEO of Broadway Technology. “Back then, new entrants into the market had typically developed unique intellectual property prior to entering the space and were forming businesses to commercialise existing technologies from academia or other industries, or to licence proven FinTech software originally built for their own use. 

“The latter applies to Broadway, whose founders built our software for their own proprietary trading firm prior to launching the firm,” he adds. “Over the years different technologies have had their moment in the sun as the exciting new FinTech du jour – CEP, grid computing, FPGAs, big data, cloud, web 2.0 – and after a period of marketing hype, the useful technologies find their place, others disappear, and the fate of vendors comes down to how their value proposition and ability to execute are actually demonstrated over time.”

LMAX Exchange has been named in the prestigious Sunday Times Tech Track 100 for three years in a row, and to CEO David Mercer, FinTech is about “making processes more accessible for big and small to allow them both to exist”. 

Mercer’s definition can be summed up in three words; democratisation, disintermediation and distribution. Around the turn of the century the emerging platforms sought to allow access to customers who previously could not get interbank quality liquidity, they disintermediated much of the voice business (especially voice brokers in spot markets) and they reached newer, typically institutional, clients.

Roll forward a few years and the first generation of FinTech retail platforms sought to bring the same benefits to the smaller end of the scale – Mercer sees LMAX’s mission as facilitating the next stage of the evolution, indeed completing the work started in the late 1990s. “We want to make markets open to anyone who wants to take part,” he explains. “We can do this by taking out the expensive middle men and making it easier to reach clients in all parts of the world – we have had clients in 90 countries for three years now, technology makes it very easy to reach more people.

“I want LMAX to be the venue that brings together everyone in the market, from the person doing a $1,000 trade to those doing $500 million – that is true democratisation and the spirit of FinTech, bringing top level services to everyone, not just a select few.”

To Mercer, one of the keys to surviving the early years as a FinTech is patience. “The challenge can be restraining yourself, especially if it is going well,” he says. “You need to ensure you manage scarce resources effectively, it is about being nimble, and focusing on your strengths. You have to allocate resources to where they are needed to help you grow.”

Moeller also stresses the need to become a trusted partner of the firm’s early clients. “Broadway built out broad capabilities in fixed income and FX, working directly with an initial set of customers,” he explains. “By the time the global credit crisis hit in 2008, we had already built a complete dealing solution years ahead of the market just when a number of top tier and emerging banks needed new advanced technology, which enabled us to double our business in two years. 

“Since 2011, we have seen similar growth in FX due to regulatory changes and cost pressure,” he continues. “It’s impossible to predict when demand will boom, but by maintaining a high bar and investing in comprehensive solutions, while still giving customers the flexibility to implement their own capabilities, you build the ability to become a trusted technology partner, ready to solve new business problems and deliver innovative new capabilities at the time when a business needs them. Reputation is key in the industry.”

No Fear

Of course, one can have access to the best brains and the latest technology, but it is worth little without the crucial element of an idea. If FinTech does indeed mean providing wider access to the type of tools and services used previously by a select group, a start up still has to target the right area – and have the right idea. “Success for a FinTech means being good at getting an idea, coding it, and implementing it,” says Mercer.

R5’s idea was simple, as Vollemaere explains. “”We have built R5 for emerging markets only. We are disrupting the old, inefficient way of trading EM, which has limited the growth of these currencies. This change is partly driven by regulation, but also by demand from institutions and their clients wanting access to trade EM electronically, in the same manner as G10.  

“We want to open up EMFX and grow the market, in the same way as G10 volumes have grown since the introduction of electronic trading,” he adds.

Likewise, a very recent FinTech start up is also seeking to take an idea from the FX markets, and roll it out elsewhere. “We will be launching a service that connects banks and the buy side to fixed income trading venues,” explains Steve Toland, founder of TransFICC. “There is currently no provider that can provide high speed, robust and low latency connectivity to over 130 fixed income venues.”

Although FinTech is inevitably linked with another buzzword of recent years – disruption – Toland doesn’t quite see it that way. “I wouldn’t call us disruptors,” he says. “The fixed income market is changing, needing to comply with MiFID II regulation, and manage the problems of market fragmentation and exploding market data rates. We are providing a solution to an existing problem rather than enhancing an existing process.”

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Although success in FX markets is inevitably associated with scale, actually getting to the stage where an idea becomes successful requires nothing of the kind. 

“The challenge for bigger firms is that while they are FinTech, it is harder for them to successfully and quickly bring a product to market because they have more controls, existing business to protect and more bureaucracy, it inevitably means they move slower,” observes Mercer. “Smaller FinTech firms, on the other hand, get to try things out, they can build prototypes and get people to use them and if it doesn’t work, they can go back to the drawing board.

“As a bigger, more established player there are risks associated with this approach, some of which are too high in many people’s eyes,” he adds. “It is hard to disrupt from within a large organisation, you naturally have to evolve in a more controlled way. You can’t take as much risk as a start up, which is why the big guys let the FinTechs do the experimental work and if they like it, they buy it, or them.”

That said, Mercer accepts there is a need at a relatively early stage, for industry support. “In capital markets there is a lot you can replace,” he suggests. “You can change the settlement process, reconciliation, and that’s where I really see opportunities for smaller FinTechs at the moment. The problem is though, you need the big guys to buy into the idea, you need a critical mass to adopt the technology, but if you have that, it can revolutionise what you offer.”

That industry support highlights the benefits of an ecosystem that has a good blend of small, risk taking idea generators, and large, established, market participants looking to build efficiency levels to maintain control of what can be huge budgets. 

“LMAX can bring to the table modern technology, we have scale – I can print every ticket produced in the FX market today, and I can multiple that by 10 pretty easily because we have effective utilisation of technology,” says Mercer. “A lot of growth can come from the back end and that helps people like us – firms who show you can create a robust, scalable environment that is cost-efficient and allows all to access the market without a big spend on things like terminals, data services and offices.

“It is not about reinventing FX, it is about leveraging newer, better technology to make existing processes better,” he adds. “FinTech can help the bigger players stay up to date. Speed is not everything in FX, but there are certain thresholds you should hit and so smaller firms can help the bigger firms with that – for example there is a microwave link between London and Chicago that costs relatively little per month.

“Hardware continues to improve and market participants need to keep up with it,” Mercer continues. “And again the smaller firms can help, for example we re-write a third of our code every year – this is something bigger firms simply cannot do – which helps them compete on a level playing field technology-wise.”

Vollemaere also sees the benefits in being nimble – and having no fear. “Changes in regulation have created opportunities for both big and small firms. The only difference is that a small company can learn, adjust its model and deliver faster,” he says. “Small companies aren’t held back by committee thinking, silos, fear of the unknown or the future. There’s a reason why FinTech is a buzz word at the moment – it’s because a lot of these good ideas are coming to market, whereas before they would have just been talked about.

“Being a start-up has allowed us to identify a problem in EMFX and build something from scratch to fix it,” he adds. “We have been able to create something designed around customer feedback, without compromise or bolting it onto an existing platform. It has allowed us to focus on building one thing only, and building it well, without the distraction of supporting other services.”

Giving, as Mercer puts it, “the FinTech room to breathe” is vitally important for a start up if opportunities are to be exploited. Moving fast is one advantage of being a small operation, but so too is the limited need to get multiple buy ins. “One of the biggest opportunities for us is to develop new products using the best technology available and not being constrained by legacy systems,” says Toland. “That means a commitment to technology with the highest throughput and lowest latency which are also open source, for example Aeron, SBE and Disruptor.

“We only recently agreed the business plan, so each of the founders knows exactly what is required of them. This means no duplication of effort and no political agenda, just a genuine desire to get the first product launched,” he continues. “Because we are a small company we are nimble, with decisions made in minutes and any communication being done face to face, as all of us sit in the same office.

“Being a start-up means we are able to have a narrow focus. That doesn’t just mean the fixed income markets, but only developing services which support connectivity. Not developing GUIs or rate engines,” he adds.

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If there is a cliché guaranteed to have eyes raised despairingly to the sky in foreign exchange circles it is “client-centric”; however, it cannot be ignored that without customers a great idea doesn’t get past the starting post.

But getting customers’ attention can be difficult, especially in such a crowded environment as financial markets. “Probably the main thing is to keep in mind what the customer wants and then make the product and company stand out,” says Toland. “You can’t be a ‘me too’ or build a business on old relationships. The technology has to be better, the business model needs to be better and you have to help solve another problem, such as costs or regulation.

“Make sure you fix a problem for your clients,” he adds. “The fixed income markets are in a perfect storm, with fragmented markets, exploding market data rates and upcoming regulation. That’s why TransFICC launched now.”

Broadway, with the benefit of more years in the business, albeit from the same roots, argues the same case. “For a FinTech startup, you need a dedicated team of extremely smart people from inside and outside of finance, a deep understanding of your customers’ business, and rock solid technology that is fit for purpose, each of which is a challenge in itself to establish,” asserts Moeller. “However, this still isn’t enough, the key to longevity is making customers successful. Financial firms depend on technology for every aspect of their business, every day. No amount of investment in sales and marketing can make up for failing to deliver day in and day out. 

“From the top down and the bottom up, your entire organisation needs to be focused on your customers,” he continues. “Regardless of the technical details of the solution you provide and the terms of the contract you sign with them, if your customers are unable to achieve their goals with your solution or count on you when issues inevitably arise, then you will not last. If you become their most trusted partner, then word will spread and growth will follow.”

Vollemaere puts it succinctly when he points out, “Focus on the customer, cut out the cost and build the best possible service.”

Although there are firms, several of the high frequency companies spring to mind, who have no in-depth knowledge of the product they are trading because the business is strictly a market structure and technology issue, who come at ideas without preconceptions, Mercer points out that a successful FinTech in the service sector can benefit from an understanding of the environment in which they are operating. 

“It is valid to ask the question, can you disrupt an industry when it is, quite rightly, all about treating customers fairly?” Mercer says. “I think you can disrupt as long as you understand what the customers need. This means that a crucial element of success for a FinTech is that it has experience and an understanding of the problem it is trying to solve without disrupting the end user.

“People cannot be afraid to fail, they have to try new ideas to see if they work,” he continues. “But they also need to overlay that with a bit of FX experience, a bit of nous. Success comes with this co-mingling of skills, views and experience.

“It is invaluable that you have someone who understands the business but who also buys into the FinTech spirit – and that the FinTech innovators are willing to listen to the experience,” he adds. “There is still a responsibility to the customers – you need them to come back and they are only going to do that if they have a good experience.”

This is an idea Toland has embraced. “The importance of the right team is even greater in a start up than with an established business, because you don’t have the luxury of existing revenue or replacement skills,” he says. “In our case we made the decision that we would only start the company if we could get a full team covering industry knowledge, technical development and sales.

 “There will always be a client who asks you to come back when you reach a certain stage or volume,” he adds. “That can be a major challenge for a start-up, but fortunately we have a few clients who are already engaged with us, providing feedback and helping us to develop the products for launch.”

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Obviously the idea and the execution of the plan are critical elements to a successful FinTech – as is scale. As noted, scale often comes via customer buy-in to a model or service.

There does seem to be a divide between FinTechs looking to trade markets, and those seeking to provide a service. Although in the modern sense a trading firm may not qualify as a FinTech, how else can one describe firms such as XTX Markets other than a disruptor? The firm has brought smart ideas and excellent technology to the table and while many high frequency firms have become market makers in name only, XTX definitively seeks to act like a bank – only quicker and, with all due respect to the incumbents, smarter. 

This means the firm has taken a service traditionally provided by banks and injected itself into the framework of the market to the degree it has changed the game. Sound familiar? It should because it could be argued it is the equivalent of what that poster child of FinTech, Uber, has done in the taxi world.

For the service providers it is harder, for just as bigger firms can find adopting new, brave ideas a challenge, so too can they be wary about investing in, or backing the wrong horse.

Good ideas are good ideas, though, no matter where they come from and in the current environment – where FinTech is as much a political play as a technology one gven governments’ desire to reboot (or replace) their ailing manufacturing sectors with “innovation labs” – customers are keen to listen.

“For us the keys to success are having a great idea, gathering client feedback and ensuring we build a product that matches their requirements,” says Vollemaere. “We have hired a few great people rather than lots of average people and invested time in building partnerships. No man is an island and no vendor lives alone.”

It is also important to keep one’s eyes and ears open, “There are 1,000 moving parts in any one venture, so focus and good advice are key,” Vollemaere adds.

As someone who has been at the helm of a successful FinTech start up, Mercer accepts the need for scale but believes it is a question of process and progress. “I know I can’t win in FX at eight yards a day,” he observes. “But by being progressive, by focusing on where the latest technology can help my customers’ business, I can move towards 30 yards a day and from there I am in a position to make a serious move to become a leader in this business.

“The key element for LMAX is the FinTech spirit in the company, that will help us grow and is important in helping us become a leader,” Mercer says. “In smaller FinTechs the keys are simple. You have to like being the underdog, have to believe in what you are doing, be flexible in how, where and when people work. 

“A lack of fear of failure is the FinTech spirit, you have to be a bit stubborn, have a thick skin, especially when people tell you, as they will, that you’re wrong,” he adds. “Be confident, size is not necessarily right. It is not necessarily about getting people from larger institutions – you want and you need people who think differently.

“You need autonomy and independence, this is vitally important, which is why I think we have succeeded, because we own the majority of the business and as such we’re not listening to a board or private equity investors who may be naturally more cautious.”

Although FinTech is seen as revolutionary in many walks of life, it can be convincingly argued that foreign exchange is not one of them because the evolution has been taking place for decades. Just last year, Profit & Loss told the story of Clack, the trading robot built in 2005 to help clients access the EBS platform in the days before EBS Prime. 

Clack was built within the four walls of a bank – it would be nice to use this as a demonstration of how FinTech can exist in a large institution, but the project was shut down within two years! Notwithstanding that, innovation in FX continues in businesses large and small around the globe, as it has for much of this century.

“The FinTech revolution is perpetual,” concludes Mercer. “I think we are fortunate in capital markets that we have existed for the last 10-20 years, because when history views this era it will be seen as financial markets’ industrial revolution.”

Galen Stops

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