Revolutionizing Finance: A Deep Dive into Fintech Innovations

In this episode of Trading Tomorrow - Navigating Trends in Capital Markets, Jim Jockle is joined by Alex Yavorsky of Jefferies to dissect the larger picture of how innovative technologies and forward-thinking companies are reshaping financial markets. From electronic trading's influence to the impact of digital transformation in traditional banking, this podcast offers a front-row seat to the evolving landscape of finance. The financial landscape is notoriously complex, and understanding where it's headed is invaluable. 

Transcript

Evolution of Fintech and Capital Markets

Speaker 1 0:07

Welcome to Trading Tomorrow navigating trends in capital markets the podcast where we deep dive into the technologies reshaping the world of capital markets . I'm your host , jim Jockle , a veteran of the finance industry with a passion for the complexities of financial technologies and market trends . In each episode , we'll explore the cutting-edge trends , tools and strategies driving today's financial landscapes and paving the way for the future . With the finance industry at a pivotal point , influenced by groundbreaking innovations , it's more crucial than ever to understand how . Thank you ahead of the curve . Join us as we engage with industry experts , thought leaders and technology pioneers , offering you a front row seat to the discussions shaping the future of finance , because this is Trading Tomorrow navigating trends in capital markets , where the future of capital markets unfolds . We live in a world where buzzwords like artificial intelligence , low-code , no-code and blockchain frequently dominate capital markets technology conversations . Yet the real revolution lies not just within these groundbreaking technologies , but in the way they're used to redefine traditional financial processes . For this episode , we're shifting our focus from the individual pieces of this puzzle to the larger picture how these technologies , in connection with forward-thinking companies , are revolutionizing the landscape and dynamics of the capital markets .

Speaker 1 1:56

Joining us to discuss is Alex Yavorsky . He's currently Managing Director of the Joint Global Head of Financial Institutions and Global Head of Market Structure and Technology for the Global Financial Institutions Group at Jefferies . Alex advises market structure and technology companies when it comes to M&A and capital raising transactions . He's joined Jefferies back in 2011 after five years with Moody Securities Firms Group and he has advised major deals like Calypso sales to Tom Abravo , refinitiv sales to the London Stock Exchange Group and Numeric sale to Genstar Capital . So , alex , thank you so much for joining us today . My pleasure . So what has stood out to you when it comes to the evolution of fintech over the last decade ?

Speaker 2 2:34

Many things , I guess , but you know , probably the central one is fintech . First of all is a very broad concept as far as the different subsectors and the different business models and use cases and customer . But I was thinking about what have been the drivers of the advent and acceleration of fintech . Really , the adaptation of technology and financial services . And the one that comes to mind as sort of the original is electronic trading , using computers to formulate a view on price and then using computers to facilitate execution , and do so in first milliseconds , then microseconds , then nanoseconds . And that was the original real use case of using technology in finance . And the question that I always had is and I think I know the answer is you know , why was it that part of finance and not others ? Where it all began ? And I think the answer is twofold .

Speaker 2 3:31

One is it's the closest to making money . You have an immediate and very concrete return on applying technology to trading , because it helps you make money . It doesn't enable processes , it doesn't reduce risk , it doesn't cut you costs , it just allows you to make more money from trading in the markets . That's reason number one . And reason number two is because technology is best at solving mathematical problems , and that is what quantitative trading fundamentally is about , and so that was , in my mind , where FinTech originally took off , which is helping firms , banks and standalone firms make more money from trading , and there were other trends that then pushed financial technology into the mainstream . One is regulation . We may end up talking about that today . Another is cutting costs . So , for example , you know eliminating expenses on physical branches or you know the human element of certain interactions with customers to reach more money . Adapting to regulation and complying with the regulation and three cutting costs to me have been the key themes that have shaped the advent of fintech , and I find to be helpful in sort of conceptualizing how the industry has developed .

Speaker 1 4:56

And how would you say digital transformation within traditional banks has impacted the fintech landscape ?

Speaker 2 5:02

Well , I guess it depends on what we mean by digital transformation , the way that I most commonly think about that as it relates to traditional banks . So the B2 , well , and banks can be , of course , b2c . That's the most traditional view of banking , but there's also a B2B aspect to it . So , in terms of B2C , it is engaging with customers , primarily to sell various banking products to them online , as opposed to entirely in an in-person interaction at a branch . You know , we all and I'm sure all of our listeners have gotten accustomed to being able to do much online certainly check our balances , look at , you know , rates and look at products , fill out the application and perhaps even , you know , complete the transaction online . And that is something that you know lends itself quite well to a digitized experience , where all of that used to happen during the hours of 10 to 3 , you know , three days a week or four days a week , you know , at a branch , and so that's , I think , been the most obvious way in which it's impacted .

Speaker 2 6:09

You know , the convenience factor for customers , the cost function for the banks , because doing that online is a lot cheaper than doing it with people in a branch and you're also able to do it a lot more frequently and at a lower cost , point to the point where , as you know , there are institutions of significant size that either have very few branches or no branches whatsoever . So that's the biggest part of it . I think , to a much lesser degree is using technology to well . It's also using technology to provide customer support , which is entirely about costs , and then automating certain back office processes . But I think the digital transformation in the traditional banking sector it has made progress , but not nearly as much as the parts that I just talked about or that it has within kind of the more nimble parts of the financial services industry .

Speaker 1 7:03

You made me think of a picture I saw . I want to go back to maybe 2011 or somewhere around there and it was a really great article and it had the homepage of Bank of America and basically every section of that homepage was under attack by a fintech company , whether it was mortgages , car loans , whatever it may be . And it appears now that , whatever it may be , how is , and it appears now that you know , and maybe you know , it's accelerated even more . But the white space is really more capital markets , it's more traditional back offers , processing , it's trading . You know . Do you feel there's maturity there and comfort of the banks working with a fintech partner at this point and giving up control or development of certain systems , or do you still think it's in early stages that there's room for more attack in traditionally the areas that were kind of behind the B2C component ?

Speaker 2 8:07

I think that it's hard to give one answer , a yes or a no , because it really depends on , first of all , if we're talking about a technology , a fintech , as a pure provider of technology , then I think the comfort level is much greater .

Speaker 2 8:23

If we're talking about a fintech as someone who then tries to acquire the end cost or already is acquiring an apparel , channel , the actual customer and is looking to provide some or all of the same services maybe not banking , because that requires a banking charter and capital and all the rest of it , but maybe trading services or payment services or things of that nature then I think banks are much more reluctant to sort of embrace the partnership model , because that is going directly after their business .

Speaker 2 8:54

So the model where a technology provider is giving them the technology solution but they're still the provider of the product , they're still the ones monetizing their deposits or their customer relationships or their brand or , ideally for them , all of the above or their brand are ideally for them , all of the above then I think the banks are . I mean , look at Zelle and other forms of payment that most people use . Those are third-party providers on some level , no different than Visa or MasterCard or other credit card companies that partner with banks . But if you're talking about , some might call Robinhood a fintech or Revolut a fintech , and I think that is a more complex relationship , certainly with someone like Revolut , where there's a partnership but there is also direct competition .

Speaker 1 9:41

Obviously , I did your introduction . You've been involved in many significant deals within the fintech space . What would you say are some of the biggest challenges in fintech M&A today ?

Speaker 2 9:52

Well , maybe fintech , m&a and capital raising let's treat them both as kind of one topic

Financial Technology Trends and Impact

Speaker 2 9:59

. So some of the I mean , if we think about it from a cyclical standpoint , when rates began to go up , interest rates began to go up in 2022 , the impact that that had was sort of negative , decidedly negative , on both sides . On the one hand , when it comes to providers of capital so venture capital firms and growth equity firms the cost of capital has gone up right . So the discount rate , when you factor in 0% , 1% versus 5% plus , makes a big difference in terms of the valuation that a provider of capital is willing or able to underwrite , and that has an immediate impact on multiples , and the effect that that has is not only the multiples at which they're prepared to invest , but the multiples that they are underwriting , that they can exit the business at , and that has a recursive impact on where they're prepared to invest , but the multiples that they are underwriting that they can exit the business at , and that has a recursive impact on where they're willing to invest Debt financing for more mature companies that actually can service debt . So think of those , as maybe 50 plus million in revenue became more expensive . For all the same reasons it's tied to interest rates .

Speaker 2 11:08

So that's on the capital provision side , which meant financial technology companies that maybe weren't yet self-sustaining from a profit point of view and because they were investing in investors or begin to save on costs and probably sacrifice growth and or product innovation . On the other hand , to the extent that the financial technology firm was selling to all the businesses , particularly financial services companies , banks and the like , and the product was , let's say , a discretionary product , not something that you absolutely must have , and there are no internal substitutes , the interest rate environment that we all found ourselves in , that had an impact on valuations , had an impact on or potential impact on , overall spending , resulted in tighter budgets . None of us are impervious to that and so that sort of created a little bit of a squeeze also from that side . The good news is that , well , the bad news is that 2023 and 22 were two years of M&A volumes being down . The good news is , in recorded history there had never been three years of down M&A volumes , and already Q4 of last year and certainly Q1 of this year so far have seen a significant pickup in announced M&A volumes .

Speaker 2 12:42

Broadly , and this is certainly true in financial technology , I think the direction of rates is a lot less controversial than it would have been a year ago . Are they still going up ? Are they going to stay here ? There is emerging consensus that maybe they've peaked and are going to be going down . Credit quality has been good , which means debt financing is available . I think there's just a lot less uncertainty than there was a year or a year and a half ago , when we were sort of at a cycle inflection point . So that's , from a banking point of view , the way I would answer the question Got it .

Speaker 1 13:19

And so you know , moving to technology , you know what technologies are fintech companies most excited about ? Right , there's the hype cycle and then the reality , and then you know . I guess at the end of the day it's you know what's your top line , what's your bottom line that's going to drive M&A . But from a technology standpoint , we hear AI , machine learning , large language models , blockchain , anything in particular in vogue at this point .

Speaker 2 13:45

I think when people use these words , they maybe don't necessarily mean the boundaries to be as concrete as a scientist would describe the boundaries , but somewhere machine learning and certainly generative AI and one is a kind of a super case of another or a user of another generative AI of machine learning and large language models are both in vogue or where the buzz is , but also where very significant amounts of money are being invested by financial firms , by strategics , in terms of , you know , acquiring firms that have that capability or investing in them or building it internally , much more so than things like blockchain , for example , which continues to be , I think , a pretty narrow part of mindshare of , ultimately , dealmakers and maybe people who decide where to deploy capital , internally or externally . But generative AI , I think very legitimately , this is a case where I think the hype and the substance probably are in closest correlation , I think . I think that's a very real trend that already is transforming business models and I think we'll continue to do that .

Speaker 1 15:00

It's interesting . I think back to the acquisition of IHS Market with S&P Global and I think even within by the time they were closed , they were even coming out and saying here's how we're going to be leveraging Kensho , and Kensho was a significant acquisition and pretty early stage when they got acquired .

Speaker 2 15:20

Yeah , so some , and there are many other companies who have seen it even before that . But yes , I mean you're up to . Kensho was probably the purest example in the mainstream financial services , information services industry of largely acquiring capabilities versus an existing book of business or revenues . What's interesting , you know , because I work in the financial services industry and obviously I haven't yet been replaced by , you know , artificial intelligence actually is the manner in which how does generative AI or just AI , you know , end up impacting the parts of financial services that are currently done I think it's currently done by humans , right , and it's actually already happening , you know , commoditized content being created by machines , by computers , kind of background information , factual information , descriptive information , you know divide , you know deriving content from , you know , financial documents to describe something or to give a summary of something , and I think that that will inevitably , you know , create margin efficiencies for businesses but obviously some disruption for people whose job description may be impacted by that .

Speaker 2 16:31

But I think in the medium term it's hard to see businesses pay significant amounts of money for content that is created in this manner . And so I think content and I'm defining content very , very broadly insights , content that is created by humans , probably with inputs that are derived from , as they are today , from databases right , I mean that's using computers , maybe in a more rudimentary fashion , as they are today , from databases right , I mean that's using computers , maybe in a more rudimentary fashion is still going to come at a premium and where there will be differentiation , because I think that's always been the cycle in the past . But exactly how that will work is going to be very interesting , but I don't think that it's going to be . You know , there are other areas outside of financial services , like we see with movies and other content creators , where I think it has a chance to be quite disruptive . I think it will be disruptive enough in financial services , but it's not the first time We've seen markets electronify and yet there's a role for humans around that .

Speaker 1 17:32

It was interesting . I recall a survey on the bond market I think it was done by Coalition Greenwich about three years ago and they were saying you know it's a voice market and it's never going to change . You know , and of course , if you're surveying the humans , of course they're going to say it's not going to electronify . But you know , clearly we've seen a lot of progress . You mentioned regulators before .

Speaker 2 18:05

There are more . I think there are more traders today sorry to interrupt than there were at you mentioned regulators before , has many and probably more traders today than there were then , because some things become electronified , because they're standardized and I would draw the parallel to , you know , commoditization of content that therefore can be produced by computers , but then other , more value added , more bespoke things come out to then , you know , require human intermediation or curation . A big question around that is regulation right Is , you know , coming out of GFC with Dodd-Frank and other ? You know , basel regulation , you know , created disincentives against that type of innovation and it took a while for the system to kind of right itself . So the way in which I guess I should augment what I said earlier , what's interesting to see is how AI will impact financial services , but also how regulation will combine with that for the ultimate impact .

Speaker 1 19:05

So we've made it to the final question of the podcast . We call it the trend drop . It's like a desert island question . If you could track one trend in fintech , what would it be ?

Speaker 2 19:16

Well , I guess it would be the one that I just talked about , so I maybe slightly stole your thunder and exactly how , again , defining it broadly , ai would change the business models of and I'm here largely concerning myself with capital markets oriented technology firms and more traditional participants in capital markets , because that's where I spend all of my time and think , for numerics obviously is a prominent participant and , again , not to be per se a betting man , but I think that it will end up improving margins on the cost side , probably undercutting pricing power because , to the extent that you know , a greater percentage of the functionality is more ubiquitously available because it is being done by an AI engine .

Speaker 2 20:07

Right , and there will be , you know , low-cost versions of that . It will push firms to innovate in areas that are still sort of beyond the reach of your traditional mainstream AI model , and that is where you know the value added services that are done by humans or a combination of humans and machines will end up sort of moving the ball forward overall and where pricing power will have to gravitate to . But I think , in terms of ultimate impact , where you maybe lose some pricing power , you would find relief on the cost side .

Speaker 1 20:43

Well , Alex , I want to thank you so much for joining us today , sharing your insights , and we'll keep the trend in mind . Thank you . Sounds good , thank you Coming up next week on Trading Tomorrow navigating trends in capital markets . Could low-code no-code change the face of the financial industry ? We talked to Brian Setheyanathan , co-founder , chief digital officer and chief technology officer at Iterate AI , about what low-code technology can mean for the future of finance . It's a conversation you need to hear .