This Finadium report documents the current state of large technology firms as a financial services provider to the retail market, then considers the implications of this growth for capital markets. We expect that big tech will enter capital markets; this is just a question of time. More importantly, what should capital markets firms do now to prepare?
Large technology firms (big tech) have started to launch retail financial services offerings, from payments to asset management to edging towards banking licenses. These moves suggest a new wave of well-financed and well-connected firms in direct competition with the established financial services industry, who are at the same time clients of these same technology firms.
While big tech has direct access to retail investors, institutional investors in capital markets are a further reach. However, they are not that far away, and there are identifiable instances where big tech has a logical opportunity to provide a range of custody, trading and credit intermediation services to asset owners, asset managers and banks. This could be done as a shadow bank or as a licensed financial services enterprise. The entry point will be by big tech becoming a major first client of their own offering, much as buy-side firms can provide initial liquidity to trade matching platforms.
The distance between providing a retail checking account and a retail brokerage account is short; most banks either offer brokerage services themselves or through a white labeled solution. Aggregating money funds can lead to a mutual fund complex, which will then be competing for retirement savings accounts at major corporations. Big tech will soon learn that some processes and markets work well but others do not. They will use their smarts and willingness to experiment to do things differently. This will lead to a level of competition that could be shocking for today’s large investment and trading firms.
This report has been written for capital markets professionals to consider the implications of big tech firms in institutional financial services. Our exploration into the topic is based on what could conceivably happen in the next one to three years; we take retail as a starting point and trace logical steps forward. Big tech firms are moving fast; banks that consider themselves immune or too far afield may find new competitors emerging in just months rather than years. Now is the time to realistically think through the competitive scenarios of big tech entering the capital markets space.
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