The theme of the fintech industry as a disruptor of legacy banks has gained potency in recent years, and for good reason. According to Accenture, investment in fintech companies grew by over 200 percent in 2014 alone, more than three times faster than overall venture capital investment. After interviewing 25 financial services executives focused on innovation, Accenture concluded that banks would need to choose between two paradigms: disrupt themselves or be disrupted. When it comes to the asset managers and wealth managers we serve, most have chosen the survivalist's path of self-disruption. More often, the conundrum they face is “build it or buy it.” For many, the best answer may be: both.
Financial firms focused exclusively on lending and payments seem to have had an easier time fostering a culture of innovation. Capital One Bank began a radical rethinking of technology's role in banking applications back in 2011 with the establishment of Capital One Labs, now operating in three major cities wielding a powerful combination of startup sensibilities and C-level support. In addition to building homegrown talent, Capital One has made a host of acquisitions including a couple of design and user experience consultancies, as well as mobile apps like BankOns and Level Money.
American Express has also been singled out as “its own disrupter” by shifting from a waterfall development approach to an agile approach. Waterfall projects proceed through the stages of completion sequentially so that once a stage is complete, it cannot be revisited. Writing specifications is an example of a stage that has a rigid beginning and end. Even if the needs of the user change during the construction of the application, there is no flexibility to return to the specification stage in the waterfall approach. The stages of the agile approach, in contrast, are more incremental and invite iteration. Specifications start off simple. If the specifications are implemented and found during testing to be flawed, tinkering is encouraged. The agile approach is generally considered more customer-centric and responsive than waterfall.
In contrast to the disrupters described above, the bulge bracket investment banks—and their wealth management divisions in particular, are grappling with organizational obstacles to self-disruption. While solid revenue growth has bolstered their stature relative to their investment banking and trading colleagues, wealth management leadership must still jockey with other teams for scarce internal engineering resources. Say, for example, that the alternative investments group within wealth management wants to add a single field to an online intake form for client qualification, a task that might take an unencumbered tech team a few hours to deliver. Because the process is often not iterative and because the alts team has to line up behind their colleagues in fixed income, equity research and M&A, the cost of that extra field might be a six-figure sum straight out of their P&L and months of wait time. Suddenly, that marginal improvement seems less essential, and tech innovation is avoided.
Though a newer phenomenon than their counterparts at investment banks, alternative investment businesses within multi-asset managers also grapple with legacy issues. Veteran long-only teams, after all, are not accustomed to sharing resources with products that, for regulatory reasons, necessitate entirely different sales processes.
Despite some growing pains, however, the largest asset managers are mostly a tech-forward cohort. Perhaps it is because asset management is their sole business line. Or perhaps it is because the market factors that lent a sense of urgency to their acquisition or development of alternative investment capabilities are fueling an equally urgent push to integrate these new offerings. Whatever the reason, the will to innovate is there and the “build it or buy it” questions looms large.
Having developed proprietary technology at the world's largest hedge fund before joining Artivest as CTO, I would encourage captive alternative investments businesses to clarify the issue by asking themselves two key questions: Is my parent firm committed to fostering an entirely new culture of innovation, even if it means rebuilding teams and processes from scratch? Is my business line my firm's primary focus? If the answer to either of these questions is “no,” it probably makes sense to outsource your disruption.
Adrian Czebiniak is the chief technology officer for Artivest.