Trading Tomorrow - Navigating Trends in Capital Markets

Revolutionizing Finance: A Deep Dive into Fintech Innovations

• Numerix • Season 2 • Episode 16

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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. 

Speaker 1:

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:

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:

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:

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:

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

Speaker 2:

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:

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:

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:

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:

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:

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:

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:

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

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:

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:

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:

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:

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:

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:

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:

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:

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:

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:

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:

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:

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.