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As a result, the capital markets technology landscape has become fragmented, with many small providers offering discrete, point solutions – and the complexity and risk that comes with managing these multiple suppliers is starting to create a headache for banks.

With private equity’s strategic support and capital, there is an opportunity for ambitious companies to address this issue by consolidating the market through acquisitions and partnerships to create integrated offerings.

Bowmark Capital spoke with point solutions providers and financial institutions to assess how specialist SaaS companies can find a path to integration, while continuing to drive innovation in the capital markets.

Smaller vendors have become fundamental to the functioning of capital markets

The capital markets have been at the forefront of the digital revolution that has swept through the economy. However, the systems architecture that powers many financial institutions pre-dates today’s demands for market connectivity. As a result, banks have increasingly turned to a variety of point solutions.

This type of specialist software, designed to solve a specific business problem and to sit on top of incumbent systems, provides essential digital capabilities for customers. For banks, point solutions have helped them to automate processes, improve efficiency, and meet more stringent regulatory requirements.

Bowmark Capital has witnessed the transformative effects that such solutions can bring to financial markets through its investment in Pirum. CEO Phil Morgan shared what inspired the company’s founders: “Pirum was founded in 2000 to tackle the manual processing that was holding back the growth of securities finance, and that is still our modus operandi. Our post-trade automation connectivity hub now handles $3.5 trillion of trades and collateral daily for market participants, helping them to navigate and automate this complex and multi-party marketplace efficiently.”

The proliferation of point solutions

Point solutions are helping banks address some key challenges. “Bank profitability has been impacted by many factors,” explained Donal Smith, Pirum Chairman and former CEO of Bowmark-backed securities finance solutions provider Data Explorers. “These range from the low interest rate environment to reliance on expensive, legacy IT systems. However, regulation has been a driving force for change and new technology adoption.”

For example, MiFID II, MAR, Basel III, SFTR and CSDR, all aimed at minimising systemic risk and promoting transparency, are changing the way banks handle data and security. Banks have adopted SaaS solutions to relieve pressure points and provide network linkages and interconnectivity, by overlaying them on existing systems. Highly specialised and cloud-native, point solutions are platform-agnostic, relatively quick and low risk to implement, and allow cross-platform networking.

These solutions have emerged out of necessity and serve an essential purpose, but they remain fragmented and under-capitalised, which can present risks to banks. “Smaller vendors have become fundamental to the functioning of capital markets,” said Julian Masters, Bowmark Managing Partner. “This creates new infrastructure risk, and the proliferation of point solutions means that banks’ technology procurement has become fragmented – this complicates security and regulatory controls.”

The involvement of an established investment partner can reduce the risks associated with procuring multiple systems from smaller providers

The path to integration

This leads to the question of how banks can forge a smooth path to digital transformation in the future. How can they benefit from specialist solutions, but avoid the complexity and compliance challenges that stem from contracting services to many small companies – and introducing a mosaic of third parties into essential systems?

Ben Challice, Managing Director at JP Morgan, outlined some of the issues. “Firstly, integration is a key consideration; as many of these software products may not interact with each other, the onus is on the user to connect them,” he said. “Banks also need to increasingly consider the security and surety of providers which has cost implications, all of which exacerbates the fact that they are simply paying more than ever to third-party service providers.”

Financial services businesses are therefore seeking more seamless integration with fewer, larger providers that provide a range of specialist interoperable solutions. This reduces procurement complexity and risk, while also driving down costs. One move in this direction could be that large legacy systems providers capitalise on their incumbency; another that banks take the lead to acquire essential systems to gain a competitive edge.

However, there is a third way: creating a network of point solutions through mergers to create fully integrated service providers of scale. Collaboration between point services providers can achieve a similar outcome, although there needs to be a clear financial incentive for founders to create partnerships. “We, the point solutions providers, would collaborate if there were a way to make it more profitable while also adding real value,” noted one industry participant.

Private equity can be a catalyst for this. Private equity investment can help point solutions providers remain platform- or institution-agnostic, by financing consolidation and partnerships to create businesses of sufficient scale and to support integration. “The involvement of an established investment partner can reduce the risks associated with procuring multiple systems from smaller providers,” said Julian Masters. “If banks are asking ‘is your solution enough?’, private equity can act as a matchmaker to ensure the full product offering is just that."

With Bowmark’s support Data Explorers achieved a compound annual growth rate of 30% for sales and 40% for profits

With the financial backing and strategic support of the right private equity partner, there is an opportunity for point solutions providers to scale up through mergers or partnerships, and to offer financial services customers the range of services they need, while also retaining the independence, entrepreneurialism and dynamism that drives innovation and creates value for their clients.

“Some, but not enough, point solution providers are looking for opportunities to collaborate on projects to drive better integration with banks’ systems,” explained Pirum CEO Phil Morgan. “Ultimately, this benefits the companies themselves but also the market more broadly. Investment in new products and strategic alliances, developed in partnership with our clients, is helping Pirum offer a range of solutions to benefit the whole eco-system.”

This approach can deliver significant growth, as Donal Smith explained. As CEO of Data Explorers, which Bowmark backed in 2007, he has seen it first-hand. “With Bowmark’s support we were able to scale the business rapidly,” he said. Under our ownership, Data Explorers expanded in the US and Asia and developed new products to meet the needs of a broader range of financial institutions, helping the business to achieve a compound annual growth rate of 30 percent for sales and 40 percent for profits.

Integration and consolidation will simplify solutions for banks

Point solutions are – and will remain – an important source of innovation for financial institutions, but the market needs to address the technology supply fragmentation risk.

By working with a private equity partner like Bowmark, with extensive experience of backing specialist SaaS businesses, point solutions providers can seize the opportunity to scale up, lead industry integration and ultimately consolidation via partnerships and buy-and-build strategies. They can draw on the expertise and capital they need to expand, while remaining platform- and institution-agnostic.

Private equity support provides a way for stand-alone providers to maintain their independence and entrepreneurial culture, while delivering the benefits of integration and scale that the market is increasingly demanding.

Tom Elliott

Words by Tom Elliott

May 23, 2022