Fidessa’s white paper suggests large firms to adopt a “Natural Innovation” approach to FinTech

Rick Steves

Trading systems provider Fidessa Group plc (LSE: FDSA) has produced a second white paper, following “Innovation Ecosystems”, in its series on innovation in capital markets called “Natural Innovation: A theory of innovation for larger firms in financial markets”, where authors headed by Steve Grob, Director of Group Strategy, extend their research about FinTech disruption further. […]

“Natural Innovation” approach to FinTech

Trading systems provider Fidessa Group plc (LSE: FDSA) has produced a second white paper, following “Innovation Ecosystems”, in its series on innovation in capital markets called “Natural Innovation: A theory of innovation for larger firms in financial markets”, where authors headed by Steve Grob, Director of Group Strategy, extend their research about FinTech disruption further.

According to Grob, innovation in capital markets poses unique challenges that need to be addressed and overcome before good new ideas can move successfully from proof of concept to industrial-strength deployed workflow.

The document comes to the conclusion that larger and more established firms can out-innovate their smaller newer rivals by following some of the deeper principles of natural selection.

Most innovation focuses on either emerging or growth categories, the first seeks universal acceptance (like blockhain technology) and the second has been accepted but looks for mass adoption (derivatives post-trade automation).

“Both are typified by the fact that there is no leader that dominates the supply in that particular category and so the race is on. The winner gets to exert pricing power in their chosen category, whilst the losers become increasingly marginalized or even forced to move to less profitable terrains.

This leads to a struggle of almost primeval technical and commercial savagery”, writes Steve Grob, adding that smaller firms have the advantage of developing and deploying products and services faster, and have more forgiving customers, and smaller cost bases.

Steve Grob then goes to ‘criticize’ the first knee-jerk reaction large firms might have, that is acquiring small, innovative firms, with generally disappointing results due to the corporate environment that swamps the FinTech startup’s innovative attitude.

Incubators and labs risk following the same path as well as ideas brought into the “real world” get usually suffocated by the intense bureaucracy, rules, process and diminished risk appetite that is essential to keep the established business lines operating well.

The white paper by Fidessa Group then suggests a different kind of solutions for large firms, that favor scale and that amplify natural advantage of the big guys.

These rules can be summed up into patience; a mechanism to simplify, direct and focus innovative efforts; discover and promote symbiotic relationships between departments such as compliance, brand, information security, regulatory; rewarding success and failure.

“Just because a firm is small it doesn’t mean that it isn’t inherently better (or even good) at innovation. And yet the traditional rules of successful deploying new fintech do seem to favor smaller firms.

Rather than try to beat the little guys at their own game, however, there is another approach for larger firms that operates with different rules and reflects some of the unique challenges of the financial markets industry.”

“These borrow from the principles that make natural selection such a powerful, innovative force and allow large firms to leverage their weight and resources”, says Steve Grob, concluding that it is still soon to know if ‘natural innovation’ is the answer for large firms, “but it does offer an approach that plays to their strengths rather than those of the fintech newcomers.”

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