Innovation From an Investor’s Viewpoint: How to Pick the Winners That Incumbents Will Back
Innovation is imperative for any organization as technological advancements, changes in market structure and client expectations have accelerated — even throughout the global pandemic. While financial services firms have led innovation by reimagining processes to enhance efficiencies, reducing costs and mitigating risk, venture capital firms have identified the trends for the next generation of solutions.
Looking at the roles that both emerging fintech companies and legacy incumbents play in driving innovation was the focus of a fireside chat at the 2022 DTCC Forum with DTCC President & CEO Mike Bodson and Mark Beeston, Illuminate Financial Founder and Managing Partner.
Shift in Innovation and Investing Strategy: Beeston’s “Road to Damascus” moment was when he built T-Zero (which was later acquired by ICE): “What made the product successful was not cutting-edge technology, but rather having the industry network available to make it an adaptable solution.” Innovation is not just about the over-the-top technologies; the industry’s high regulatory standards make the technology that powers the personalized experiences experienced by consumers challenging for mass adoption in financial services.
The Investor Dichotomy: Bodson spoke about investors who are excited for newer technologies, including DLT and AI, but at the same time these technologies need to solve a problem and have a use case. Beeston agreed, noting the inherent danger in deciphering what individuals find exciting and what they are ready for.
From Physical to Digital to Decentralized: The industry has moved from pure paper to mainframe, then to PCs. Now digitization is moving toward decentralization. Bodson asked about the timing of venture capital investments given the slower pace of change in the financial industry. According to Beeston, “The exciting opportunity for the institutional digital assets space is a set of future-proof and highly efficient set of digital rails, that some part of the industry will start utilizing.”
The Growing ESG Opportunity: Bodson noted the interesting connection between Environmental, Social and Governance (ESG) factors and how governments are looking to finance as a catalyst for climate change issues. Beeston agreed, adding that ESG factors resemble credit 20 years ago: “The explosion of the credit derivatives market drove an explosion of a new form of data — credit data. The opportunity today starts with the availability and viability of data.”
Witnessing a Financial (R)Evolution: Firms can be seen as either disrupters creating a revolution or disruptees adapting to an evolution. While a startup company may pose a threat to incumbents with the introduction of new technologies and business models, industry incumbents are still critical for fintech firms. While they can be the disruptee, they can also be the aggressive acquirer.