Asset managers hunt for fintech buyouts

Asset managers hunt for fintech buyouts

Nearly a third of large banks and asset managers expect to buy a financial technology firm in the next 18 months, according to a fresh report.

This comes amid criticism that asset managers are in danger of being left behind due to rapid changes in technology.

The study, compiled by international law firm Simmons & Simmons, found that many companies are looking to pursue a fintech takeover, despite 45 per cent saying they were worried about the regulatory risks of moving into this space. 

Penny Miller, financial services regulation partner at Simmons & Simmons, said the fintech sector is relatively immature, meaning the regulatory framework isn’t tailored to these business models.

“Some fintech businesses also operate in newly regulated areas where there is a patchwork of new – and untested – regulation across different jurisdictions.”

While half of the 200 respondents had collaborated with fintech firms in the past three years, the report found that most large institutions are poorly equipped to integrate with these types of companies.

The study also revealed that asset managers preferred building their own in-house fintech unit when compared to banks.

The financial industry has come under increasing pressure to install cyber security systems in a bid to protect businesses from digital attacks.

The study found that cyber security risk is the biggest barrier when it comes to forming partnerships with fintech firms, reflecting the financial sector’s strict compliance requirements.

Robert Allen, financial markets litigation partner at Simmons & Simmons, said there is an “economic imperative” to share data with partners to help provide better services to customers.

But he said this does carry risk, pointing out that financial institutions could be legally liable for a security breach, and are in danger of suffering a huge hit to their reputation if anything goes wrong.

“So you really need to trust the people you are sharing data with,” Mr Allen said, pointing to the importance of carrying out technical and legal diligence on potential partners.

Stefan Mittnik, founder of Scalable Capital, said building up digital expertise within the business is often a lot more expensive and time-consuming than many firms might expect.

He said companies risk their technology not being a success, or being too late to the market, saying it was therefore a "reasonable option" to buy an already successful or very promising fintech firm.

"Overall, I expect there will be a big sorting process where asset managers and startups will team up," Mr Mittnik said, adding however that these partnerships will form under a broad range of setups and institutional arrangements.

Cyber security, he said, will be a huge factor to consider, but is also an area where fintechs might have an edge compared to old-world asset managers with old-world IT technology.