The U.S. government places extensive regulations on investment banking and related activities, including the use of technology. And while this means operating in the space is far from a simple proposition, Finalis CEO Federico Baradello explores the need to build an infrastructure of trust.
“Investment banking services are more difficult to unbundle given significant regulatory restrictions for the industry.”
— CB Insights report, “Unbundling Bank of America: How the Traditional Bank is Being Disrupted”
The above quote calls out a specific pain point in today’s investment banking industry: We have technology that would be greatly helpful in making investment banking more efficient, but the regulatory environment makes that incredibly challenging.
A clear-eyed response to this problem is to recognize and understand those regulatory restrictions, so as to tackle that problem head-on. Getting a handle on this allows regtech startups to transform and democratize investment banking by effectively scaling the trust layer for participants in the long tail of the capital markets space.
What do we mean by scaling the trust layer? And who are these participants?
The trust layer has to do with the ability to provide a watertight process for regulatory compliance on any given banker or deal — and solutions for such back-office services are increasingly on offer by tech-savvy independent broker-dealers.
The participants here are investment bankers and placement agents — from one-person boutiques to mid-size firms — in partnership with the cutting-edge broker-dealers servicing them. These broker-dealers are today led by a generation of imaginative, restive Millennials intent on cracking open a space long dominated by legacy bulge-bracket banks with in-house and outsourced regulatory services encumbered by legacy tech systems unsuited for the 21st century.
Taking that trust writ small in the context of a boutique bank and scaling it into trust writ large across the length and breadth of investment banking means democratizing access to world-class compliance in capital markets. It means making it easier for capital markets participants to plug into the leading-edge infrastructure of a modern brokerage platform so they can compliantly engage in capital markets.
Fintech notables such as SoFi and Robinhood have waged pedal-to-the-metal attempts at unbundling elements of the banking tech stack but have done it in a vacuum for their own specific purposes. Most independent or smaller participants in the space don’t have nearly the resources to attempt the same gambit.
A fintech or regtech company seeking to transform the broadest scope of the banking industry would be intent on building a new platform, one on which the currency, as it were, is based on trust. And, since it’s a platform — one steeped in democratizing fundamentals — that trust layer is, therefore, scalable.
Where such regtech startups operate is in being the connective tissue between the regulator and the long tail of capital markets participants. Because if you’re a small bank, you don’t have the resources to build the type of regulatory infrastructure that a bulge-bracket bank does. There is tremendous opportunity in building that infrastructure and then licensing access to that infrastructure and doing it in a highly scalable way. That’s scaling the trust layer.
So, how is that trust scaling accomplished? Four essential elements apply:
- Be thoughtful and meticulous about comprehensively addressing compliance pain points for investment banks. They all have essential and critical needs that regulatory service providers can address by delivering highly reliable solutions with minimal error-rates.
- Judiciously leverage technology. Compliance workflows can be streamlined at scale with the aid of innovative software solutions, and tech-enabled providers are maximizing efficiency, while cutting costs at the same time.
- Finely calibrate the human variable in the “human in the loop” equation. It’s essential to strike the right balance between humans and the tech wizardry they wield. In the context of regtech, a superior white-glove customer experience is achieved with responsive communication channels featuring real human beings providing bespoke microservices enabled by cutting-edge tech.
- Work closely and transparently with regulators. Keeping open channels of communication and collaboration with regulators about compliance issues means an attitude of looking at the regulator as a partner rather than as an adversary. Regtech companies fostering a forthright, reciprocal relationship with their regulators own a basic element of a scalable solution in the space.
Just recently, the ENABLERS Act, a major, bipartisan, anti-money-laundering bill, passed the U.S. House of Representatives. A report in the D.C.-based International Consortium of Investigative Journalists points out that regtech service providers, who are on the leading edge of compliance and due diligence processes, are clearly empowered by substantive and far-reaching legislation like this in their efforts to keep business integrity at the highest level.
These principled efforts begin by providing the basic currency of trust for clients. Once established, and with the aforementioned four elements applied as the scaffolding of the infrastructure, the trust layer truly scales — almost as an inevitability — and the widest expense of opportunity opens up to the broadest segments possible in the capital markets.
The financial world is now deep in a fraught era of uncertainty and turmoil in the global markets. Scaling the trust layer is both a strategy and a tool that can lift all boats in the investment banking ecosystem, for participants both large and small.
Federico Baradello is founder and CEO of Finalis. Prior to founding Finalis, Fed worked as an attorney at Kirkland & Ellis, where he managed M&A deals for blue-chip private equity firms and strategics, from term sheet negotiations and auction bids to closings. Before his time at K&E, he was an associate at a London-based private equity firm in which he supported cross-border deals in Europe and Australia. 
