Following a decade of strong growth, core market infrastructure groups (exchanges, CCPs, and CSDs) face a revenue gap of ~US$6-10 billion by 2022 versus market expectations.
Annual industry growth is forecast in the range of 2-4 percent within the market infrastructure ecosystem (primary, trading, clearing, securities services, data and analytics, and technology solution), short of continued high market expectations of ~7 percent of growth. Custodians and market data providers face similar challenges.
Core market infrastructure groups, custodians, and market data providers need to rethink their positioning in the broader capital markets ecosystem to tap into additional revenue pools and growth opportunities. Solving the big problems of capital market participants, both on the buy- and sell-side, for issuers and to some extent for regulators, has the potential to create the breakthrough growth needed.
Opportunities lie in global access and connectivity, data management, vendor management, process efficiency, and regulatory, and risk and compliance, with a total addressable revenue pool of between ~US$23 billion and ~US$42 billion (EBIT ~US$7-13 billion) by 2022.
We expect solutions for process efficiency on the buy- and sell-side to be the biggest bucket and account for approximately 40-50 percent of total revenue upside. Solutions for data management across buy- and sell-side participants are the second major revenue bucket with an estimated size of between US$5-10 billion. Regulatory, risk and compliance solutions yield another US$4-9 billion across buy- and sellside participants (see table below).
1. Vendor management pain point of buy- and sell-side and underlying revenue potential covered with platform solutions for data management, process efficiency and regulatory, risk and compliance
Source: Oliver Wyman analysis
How Market Infrastructure Providers Can Address Big Customer Problems
Market infrastructure providers are well positioned to address these big problems, given their neutral position at the heart of the capital markets ecosystem, their infrastructure edge, their privileged access to vast proprietary data flows, and their evolving analytics capabilities. Existing relationships with the largest market participants, and the potential to scale solutions across the industry, can be leveraged. While many of these emerging opportunities are already actively discussed within the industry, so far market infrastructure providers have not extracted significant value out of them.
Going forward, we expect a small number of winners to capture the major share of this value based on globally scaled solutions. This will particularly be the case for data management (such as a data aggregation platforms equipped with a broad set of analytics tools to generate market insights), process efficiency (such as automation of securities operations, collateral, and liquidity optimization tools), and risk and compliance solutions (such as KYC utilities, AML utilities, and risk model development “as a service”).
Core market infrastructure groups, custodians, and data providers need to overcome their current challenges to capitalize on innovation. It will be critical to manage innovation with rigor and discipline and put more emphasis on the capabilities necessary to deliver customer and shareholder value. To succeed, we believe that market infrastructure providers need to think and act more like big technology firms (such as Amazon, Facebook and Google). Five key success factors will enable them to capitalize on innovation and to achieve breakthrough growth (see diagram below).
Five Priorities For The C-Suite
Market infrastructure providers need clear priorities to capitalize on innovation:
1. Accompany customers on their journey to solve big problems end-to-end: introduce customer experience concept and introduce/upgrade relationship management roles to better understand the needs of the buy- and sell-side; evaluate core strengths to serve as “crown jewels” for active solutions in opportunity areas (such as superior AI capabilities to address the ‘data management’ problem); select accessible opportunities; aim to build an active solution over time with a “flywheel” effect, leveraging customer usage data to tailor and scale the offering.
2. Upgrade and ringfence the workforce to provide required skills and increase focus: identify skills and profiles (such as data scientists, software engineers, and experience designers) required to solve selected big customer problem(s); identify existing employees with the right profiles or that could be upskilled; fill further gaps by hiring new talent (update talent value proposition to compete against big technology firms and fintechs for the best talent); facilitate ongoing learning to stay on top of new technological developments; ringfence the innovation workforce where required; and install a dedicated executive leadership (beyond pure sponsorship).
3. Promote an agile corporation culture to increase speed of innovation: promote a mandate of purposeful experimentation with the freedom to test and learn; sponsor agile development cycles with specialists working shoulder-to-shoulder with business and functional experts in a flat hierarchy; facilitate agile leadership with fast decision making; and encourage end-to-end ownership and autonomy to foster an entrepreneurial mindset.
4. Provide state-of-the-art technology solutions to overcome legacy infrastructure burden: evaluate building from scratch versus leverage of incubation unit (as available) versus acquisition of a fintech to accelerate the infrastructure development (and ideally also strengthen the crown jewels identified).
5. Increase and channel funds for the long term to facilitate breakthrough growth: increase investments into change; embrace a more venture-capital and longer-term investment mindset; more stringently prioritize organic and inorganic investments based on return and risk filters.
For more information and detail on how market infrastructure participants can achieve growth, download the full version of the report.