Financial Technology Impacts: YOU are in Darkness – And, THIS is a Flashlight.

Disclaimer: Opinions and a grain or two of salty language contained herein are solely those of the author.

Save your time. Just, pick up the flashlight now.

Ok. Here’s some bait: Chances are quite high that you are searching for answers in the darkness (amidst the chaos). And the tools that you have at your disposal – typically in the form of 5,000 or 10,000 word salads with few pictures and fewer numbers from a “pedigreed” purveyor of guidance – actually do not emit much light.

The good news is that you need not toil in darkness any longer. There is a flashlight at your disposal – and, unlike a normal flashlight, this one is designed to grow in luminosity and enhance your enlightenment at the same time.

Now, you can continue to deny that this is your reality – and continue as you are – or, you can check out the flashlight.

Still skeptical? Here’s more of the pitch: I have been successfully solving complex puzzles for a very long time. The puzzle that fascinates me and tickles my curiosity most right now is the one that sits at the core of Alphacution’s research mission:

To assemble a 360º composite ecosystem model that measures the economic impacts caused by adoption of information technologies on a broad range of participants in the global financial services industry. 

Yes, true to its nature of perceived complexity, an accurate description of this pursuit is a mouthful. Let’s just call it a 360° “FinTech-onomics” modeling mission for the time being.

After nearly 3 decades playing around in some pretty fascinating corners of the trading and research arena, I have come to a number of conclusions, most of which should be self-evident:

  • Everything is interconnected.
  • Technology strategy is increasingly central to business strategy.
  • Business leaders in financial services – including banking and asset management – don’t have or can’t find the  “navigational” tools they need for their business transformations.
  • Quantifying IT spending patterns universally yields rare intelligence about operational and business trends.
    • Benchmarking IT spending patterns is even more impactful than simply quantifying them.
    • Benchmarking anything requires standards.
  • No one – few, to be generous – has developed a standardized framework to quantify, and then benchmark, IT spending.
    • Ideally, such a framework, should be fractal – it should function properly at varying degrees of granularity.

Summary Hypothesis: Since everything is interconnected and IT strategy is central to business strategy, measuring and benchmarking IT spending patterns yields rare, impactful and ongoing intelligence about financial services business transformations.

Now, pick up the flashlight.

Still skeptical? A little overly attached to the darkness, are we? Here’s an abbreviated whiff of Alphacution’s output:

When the tides rolled in during the pre-GFC decades starting in the 1970’s, they raised all boats. Financial engineering was in its infancy, new products and services yielded fattening margins and profits. In an atmosphere like that, no one stops to check for wayward nickels and dimes hidden in the back seat of the corporate limo. Now, several years into the post-GFC era, everyone is doing their impersonation of a rugby scrum by clamoring for those same nickels and dimes.

Why? The biggest buyers of technology in the ecosystem – large global banks – are in turmoil. (This fact is indicative of the state of much of the ecosystem.) They smile, gesticulate and busily blow air into their charm offensives, but they can’t hide it any longer. The following exhibit implies much of that part of the story – and beyond…

Psst. Pick up the flashlight.

Meanwhile, there are knock-on effects rolling over the landscape. Though not perfectly correlated with the top investment banks illustrated above, the Enterprise IT sector – containing firms like IBM, HP, Dell and Intel – is collectively experiencing the challenges of shrinkage, transformation and disruption (across numerous sectors).  The exhibit below illustrates aggregate revenue for 11 top Enterprise IT companies over the past 12 years. It’s hard to avoid noticing the post-GFC rollover – which is partly due to declining pricing power and partly due to disruptive innovation, such as hardware “compression” and IaaS.

Pick up the flashlight.

Similarly, the IT services sector (aka – outsourcing / offshoring) – which from a revenue and headcount perspective has been on a white-hot tear for as long as anyone can remember – has also gradually lost its pricing power, thereby dramatically limiting its ability to innovate around productivity. With banking, financial services and insurance (BFSI) representing the largest portion of global IT services – which Alphacution estimates to be 30.9% of total revenues for 2016 – we don’t believe these statistics are going to make a turn towards the heavens anytime soon. In the exhibit below, Alphacution presents its estimate of the weighted-average revenue per employee (RPE) for 26 of the leading IT and professional services companies for the past 12 years. BTW, much of this decline is due to competitive issues that weigh on non-India domiciled IT service firms (like Accenture); a story that Alphacution will be exposing in much more detail in its upcoming IT service study.

It’s free. Pick up the flashlight.

And, finally, we arrive at a sector we like to call “Big Fintech”: Here, Alphacution’s preliminary modeling yields an entirely different tale from those presented above. The exhibit below – representing firms like FIS and Thomson Reuters – illustrates aggregate revenue for 5 large financial technology (and market data) providers over the past 12 years. Primarily amped up by acquisitions, this sector has still been able to disguise its plight – however, those tides are turning, as well. Alphacution will be digging much more deeply into this part of the ecosystem narrative later in 2017.

Pick up the flashlight, you stubborn bastard!

No? Well, then, there is no pleasing you

By | 2018-02-28T16:33:35-05:00 March 15th, 2017|Alphacution Feed|

About the Author:

Paul Rowady is the Director of Research for Alphacution Research Conservatory, a research and strategic advisory platform uniquely focused on modeling and benchmarking the impacts of technology on global financial markets and the businesses of trading, asset management and banking. He is a 30-year veteran of the proprietary, quantitative and derivatives trading arenas. Contact:; Follow: @alphacution.