JP Morgan Private Bank Publication - The FinTech Choice

Mark Munoz, Managing Director for Contineo & Venture Partner at Vectr Ventures

Financial Technology – or FinTech as it is commonly known – is riding a wave of unabated enthusiasm. The industry attracted US$12.2 billion of capital in 2014 alone1, with new players looking to replace or enhance traditional banking services – from smartphones offering contact‐free payments to artificial intelligence services providing investment advice. Banks are realizing that the days of incrementally updating legacy systems and patching solutions when possible are ending. In turn, there is a shift from the “run versus change” mentality toward a “run versus innovate” model.

FinTech startups are gaining recognition from banks and investors alike, albeit for different reasons. Whereas banks are keen on partnering with those who can offer them an edge in this digital shift (whether by cost streamlining, providing greater transparency for regulators, increasing their service distribution range or revamping outdate processes), investors should instead be looking at how sustainable their business model is, or whether they have a competitive advantage to endure a financing crisis during their early growth phase; when their brand is not yet well established. In either case, investing in FinTech is not a short term trade, it should be done by those who are prepared to be long term partners. Given the importance of longer term sustainability, below are a few aspects investors need to consider:

The strength of the team is the top criteria. Unsurprisingly it is among the first things experienced VCs look at when making an investment. Having the right team can make or break the company, more so than the idea behind it. Investors will want to look at the right level of expertise and experience of the founders, the right background/academics, past track record and reputation in the sector.

Investors should be familiar with the startup’s niche sector and business model. Although often used as a generic term, FinTech tends to be quite specialized across a wide range functions, from data analytics companies that establish a borrower’s loan risk to blockchain solutions for derivatives trading and the record‐keeping of complex products. This means keeping up‐to‐date with market developments and becoming comfortable with the nuances of the sector. It’s important to note, most FinTech startups won’t survive the first years; so if investors do not understand bitcoin, or payments, or lending, it may be best to invest elsewhere. Understanding the competitive landscape is necessary, as the companies that lack competitive advantage will be quick to fall behind the pack.

Keeping close checks on market changes and emerging trends is especially relevant. In this sector there are many fast moving parts. A new technology, a newly accessed market or changing regulation can quickly blindside someone looking to make an investment without the proper due diligence. The emergence of RegTech (technology focused on supporting banks in meeting their strict and ever‐ changingregulatory requirements), for instance, is a testament to how new entrants are creatingsolutions for an evolvingindustry demand. Fintech can be a catalyst for innovation, benefitting banks and regulators alike and create key opportunities.

The potential market size is big, there is a sound strategy to win customers; but how well can a small company take advantage of this opportunity? Having a scalable business model is imperative for success. Scalability and an appropriate pricing model makes a notable difference from leveraging distribution networks, engaging in trusted partnerships and cost advantages. Scale ensures the business can grow up to a level where investors will get their money back.

Whether a startup, a home or an asset, an investor needs to trust what he is buying and to be convinced that this business addresses a real concern or problem in the marketplace. The founders’ vision needs to solve a problem and do so in a simple and innovative way. If the supply chain is too complex, or the value proposition is not clear, the investor might need to rethink.

The FinTech space is quickly becoming a crowded one. The added choice is great for consumers and market participants, but what does it mean for the sector? The FinTech world also has its fair share of challenges and shortcomings compared to leading banks. These include questions around client trust, a lack of long‐term credibility and the absence of an existing client base. Another difficulty is the culture clash that potentially exists between the tech and banking world. Successful startups will need to adapt to the inner workings of banks and gain credibility for delivering trustworthy solutions for consumers.

Out of expediency, banks have typically had a culture of quick fixes and improvised patches, mixed with long approval processes and committee sign‐offs. As with any investment, understanding the risks is imperative.

It should be apparent by this point that FinTech will soon be facing a big rationalization. Does it mean that now is not the time to look at investment opportunities? Of course not, the potential opportunities are too great to ignore. It does mean, however, that this is the time to be selective and discern which will be the startups that will define the future of the sector. Investors must look past the noise and hype surrounding FinTech and choose the right founders, with innovative ideas, who are well placed to capitalize on emerging technologies in this new market.

Bloomberg Newsletter- Multi-Issuer Services in Asia will have to Consolidate, Contineo's Munoz says

Multi-issuer platforms in Asia eventually will have to consolidate to survive in the region’s fragmented structured-note market, according to Mark Munoz, managing director of Contineo Ltd., which provides one of four such services in Asia. Viren Vaghela of Bloomberg Brief spoke with Munoz by phone.

Q: Contineo has been operating as a multi-issuer platform in Asia for 10 months. What have you achieved?

A: We have seven bank issuers: HSBC, Barclays, Goldman Sachs, JP Morgan, BNP Paribas, Societe Generale and Natixis, and hope to announce two more later this year. We also have five private banks including Julius Baer, JP Morgan Private Bank and BSI, and two more are lined up to join by June. They are both medium-sized firms based in Singapore.

We have an indication [from our research] that the size of the [Asia structured-note] market could be as big as $125 billion in [sales] each year, which is larger than the combined value of the Hong Kong and Singapore stock markets.

Q: Have you seen any recent trends in Asia structured-note issuance?

A: As volatility is low, trading volumes are flat, not just for our subscribers but for the industry as a whole. However, we have seen a lot of interest in Asia and US technology stocks as underliers, but less so for Europe (click here for March breakdown).

Q: Is there space for more than one multi-issuer structured-product platform in Asia?

A: I look at how networks for other asset classes work and you can have multiple networks. For Asia, it may be more challenging given how [spread out] the market is, so fragmentation will only hurt us and consolidation is inevitable.

Q: What big initiatives do you have planned for this year?

A: We expect to tackle issues such as common term sheets for the industry as it’s a cost and a pain. The private banks want standardized term sheets and the issuer banks on our network would like to do that to lower everyone’s costs.

Our big initiative, and we haven’t announced it officially, is that we are adding life-cycle management to the network this year. Life-cycle management includes notification of knock-in and knock-out events, notification of maturity and expiration dates, corporate actions and valuation information.

When we met with the private banks last year this was a constant source of pain for all of them.

Q: Given the huge structured-note markets in Japan and Korea, will you be expanding into these countries?

A: While we are focused on Hong Kong and Singapore, we are expanding our team and expect to grow our market presence in Japan and Korea in the coming years. Once or twice a month we are approached by an issuer or private bank in Korea, Japan and Thailand, so there is interest, but we are focusing on our two core markets until our platform reaches full scale.

Q: What’s the biggest challenge you and Contineo had to overcome to get to this point?

A: One is perception. There’s a lot of information in the market that it’s controlled by the investment banks which is unfair in some respects. We are a small company that has been able to make big strides in large part as we have been able to work with buy-side and sell-side banks on a number of standards that bring efficiencies to the market.

Q: You have companies from the same financial group on your platform as issuers and private banks. How do you ensure no information leaks from say JPMorgan’s private bank about issuing banks’ pricing to JPMorgan’s investment bank? Is there a Chinese wall in place?

A: Other issuers can’t see their competitors’ pricing, so issuer A can’t see issuer B’s pricing on the request for quote, but the private bank can see multiple pricing. We are careful on data dissemination and mindful of confidentiality.

Q: Now that you have secured a broad range of issuers and private banks, what are the chances of bringing on some of the biggest issuers and private banks in the market like UBS and Credit Suisse?

A: Without mentioning names, certain investment banks want to control their internal flow so a multi-issuer platform is a threat to their core business, but it’s inevitable in terms of what private banks want to see.

Even though some banks have their own networks and have invested heavily in them, they recognize the benefits of a centralized hub like Contineo. As the network grows and adds more payoffs, the value-add will become apparent.

This interview was edited for length.