New York: A new type of hedging is sweeping Wall Street this year.
Goldman Sachs Group Inc and JPMorgan Chase & Co are leading big banks in ploughing record funds into outside ventures trying to disrupt their industry, a role typically dominated by venture capital firms, according to a report from Opimas, a management consultancy.
Goldman Sachs has invested in about 15 so-called fintech firms focusing on capital markets businesses this year, while JPMorgan has bet on nine, the report shows. Altogether, banks and other established companies will probably pump a record $1.7 billion (Dh6.2 billion) into the sector through 83 deals in 2017, Opimas wrote in its report, citing figures from CB Insights. That may turn would-be challengers into allies.
VC firms, meantime, are relatively reluctant to target the industry, despite its potential to yield a big payoff, Opimas found. Wall Street ventures drew only 2.6 per cent of their funding last year, it said, citing data from Martin Prosperity Institute.
Competitive dynamics
“Capital markets fintech should attract more than its fair share of venture capital and private equity investment. Instead, we see precisely the opposite,” the authors including Opimas CEO Octavio Marenzi wrote in the report. “Many VCs have shied away from these markets, since they frequently require highly specialised knowledge of markets, their micro-structure, and competitive dynamics.”
While banks have long trumpeted their technological prowess, cheap computing power and fears of losing clients to start-ups are ushering in a new era of automation and other tech-driven platforms. Almost 50 per cent of financial services firms around the world plan to acquire fintech start-ups in the next three to five years, PricewaterhouseCoopers LLP said in an April report.
Still, for banks, the money they entrust to fintech ventures is a tiny slice of what they spend on tech — most of which they keep in-house. Financial institutions are on track to dedicate more than $127 billion to technology this year, focusing on areas such as execution management, post-trade transaction processing and analytics.