3 min read

Disruption Within A Regulated Industry

Disruption Within A Regulated Industry

TAN T-KIANGBy Tan T-Kiang, Chief Technology Officer, Grasshopper

Financial innovators face pitfalls and hurdles to compete successfully in a highly regulated environment and it’s not for the faint-hearted.

Customers around the world claimed to have lost $2.4 trillion in February 2014, when Mt. Gox, a Tokyo-based bitcoin exchange and the biggest in the world at that time, closed trading and took down its website. The decision was made just days after all withdrawals had been suspended and Mt. Gox CEO Mark Karpeles had resigned from the board of the Bitcoin Foundation.

Of the missing $2.4 trillion, only about $91 million has ever been recovered to distribute to claimants. Considering that all the Bitcoins in the world only add up to $7 billion, or 0.3% of the claim amount, the mystery surrounding this notorious incident involving the controversial currency is a timely reminder about the dangers of any decentralized and unregulated environment.

The fact that it occurred within the finance industry, one of the world’s most regulated industries, is a clear warning that we should not disregard the regulations that serve to protect the most vulnerable members of society, even if they seem to hinder and fetter disruption more than innovators and entrepreneurs would like.

Of course, disruption itself is an inherent feature of the world today, and an irresistible force in many industries. However, it is a significantly more achievable endeavour and its consequences are more benign in some industries than others.

For example, within the technological sector itself, the gaming ecosystem has been singled out for cultivating disruption. With an ever-evolving customer base, that is increasingly diverse but still bound by a collective identity that promotes a high comfort level with adaptation and change, the gaming industry has grown from strength-to-strength.

In terms of creating compelling content and capturing market share, everything - from content channels to gaming devices - has been disrupted. Long-established gaming heavyweights such as Nintendo and Sony are suffering an erosion of their businesses as relatively new players such as smartphone companies enter the market.

In contrast, heavily-regulated industries, such as finance, do not explicitly encourage innovation. After all, innovation stems from free-thinking, creativity and the capacity to allow for failure – all of which do not meld well with the stiff regulations that govern finance. Perhaps, the lack of free food and scattered beanbags in traditional financial firms makes it difficult to attract the top technological talent necessary to drive such change.

But jokes aside, it is tough to innovate from within an entity that is so heavily regulated. Many financial institutions have had to pick the necessary evil of diverting their resources into regulatory compliance rather than invest in innovation.

Forced into a position where their technological advancement measures are mostly reactive, banks and exchanges have been fending off rising competition from externally-led digital disruption, especially from the burgeoning Fintech sector, where companies have gained significant traction and recognition. These include major players such as Apple, Google and Alibaba, all of which offer payment services that were previously only provided through old-style financial institutions.

Despite the entrenched obstacles that limit the industry’s potential to drive innovation, traditional incumbents that do not increase their level of digital innovation to promote agility and advancement can be sure of one thing – they will pay the ultimate price of becoming obsolete.

Incentives to innovate
Ranging from automated teller machines, to online banking, to online payments for credit cards, banks around the world have shown that they are willing to adopt new technologies, even if the complex nature of banking systems means it is difficult for these institutions to implement digital disruption.

Exchanges, once dominated by established institutions, have been highly adaptable in terms of altering course.

The London Stock Exchange remodeled itself as a clearing and data operator rather than a traditional stock exchange. Futures exchanges such as the Chicago Mercantile Exchange surpassed traditional stock exchanges in value and acquired them, and other exchanges, such as the Singapore Exchange, moved from being primarily open-outcry trading platforms to fully-fledged technology-driven exchanges providing fair trading practices.

Meanwhile others, for example the Tokyo Stock Exchange, are investing in revolutionary technology such as blockchain, which they hope could change the way exchanges do business.

Moving forward, organisations should collaborate to leverage on their respective strengths. Large entities should work with smaller startups, and indeed, some have already pioneered the use of sandboxes or formed partnerships with fledgling companies to work together on projects and trials.

For instance, last year, DBS Bank in Singapore opened DBS Asia X, an innovation hub that has project pods and co-working spaces, that will house 40 startups that were part of an accelerator programme created and run by the bank.

Startups can lean on the infrastructure that larger organisations can provide, such as their hardwire expertise in regulatory compliance, established market presence and capital resources rather than building them from scratch.

And larger organizations would do well to learn from the startup culture of agility, being willing to embrace failure, and working with iterative improvements without knowing how the end product is going to look like – all traits which are fundamental to innovation and change.

Startups that have entered the financial industry and are discouraged by the maze of austere regulation should take heart. For startups that do not have the strength to innovate in an environment strewn with obstacles, it might be a wiser and, perhaps, an easier choice to pick another industry that is not quite as regulated.

However, those who believe they possess the necessary mettle, and are able to find the right partners and the best staff, might achieve results that will change the world we live in as well reaping lucrative rewards.

We’d love to hear your feedback on this article. Please click here


The Ongoing Role Of Multi-Asset Technology: A Roundtable Write-Up

4 min read

The Ongoing Role Of Multi-Asset Technology: A Roundtable Write-Up

THE ONGOING ROLE OF MULTI-ASSET TECHNOLOGY: A ROUNDTABLE WRITE-UP On the 25th of June, over 25 representatives from the buy-side, sell-side, vendor...

Read More
Upgrading Post-Trade Operations

3 min read

Upgrading Post-Trade Operations

By David Pearson, Head of Post-Trade, Fidessa Already well-established for cash equities, automated trade matching, reconciliation and confirmation...

Read More