B2B financial software marketplaces: the bridge to market transformation
Nearly a decade ago, Andreessen Horowitz declared that software is eating the world. Evolving from applications designed to solve enterprise-specific problems, the advent of open application programming interfaces (APIs) saw it begin to connect markets and today it has found its place as the lynchpin for total market transformation. Driving industry-wide efficiencies, end-to-end transparency and cross-market insight, the race is on to build and own these “industry homepages” with B2B financial software marketplaces that unlock the value of a sector’s ecosystem and facilitate change on a global and industrial level.
B2B financial software marketplaces connect players across the breadth of an industry and facilitate the digital exchange of data or financial assets. By embedding third-party services that enrich the ecosystem, the marketplace can now tackle sector-wide problems, such as accessing a single source of real-time data or providing end-to-end transparency.
Old problems, new tricks
The concept of connecting marketplaces is not new – for decades they have facilitated connections, streamlined processes and created visibility across entire sectors.
Nearly 50 years ago, Swift materialised to standardise and secure financial messaging for a global community hitherto reliant on telex, evolving to exploit new developments in technology to reach its standing today as the market powerhouse, delivering over seven billion messages a year.
The digitisation of financial exchanges – stocks, bonds, commodities or FX to name just a few – connected global markets and automated trading, which eliminated the inefficiencies inherent with manual processing, as well as introducing market-wide supervision and transparency across clearing and settlement activities.
And today, these marketplaces continue to expand and nuance to cater for the full spectrum of financial markets across multiple asset classes ranging from credit and FX through to mortgage securities, providing end-to-end transparency and streamlining price discovery, order execution and trade workflows.
To illustrate just how these multi-party digital ecosystems create fluidity and connectivity across entire sectors, I’d like to share two examples.
Overcoming syndicated lending inefficiencies with a marketplace model
A flexible, open architecture is at the heart of any digital marketplace, given its propensity to integrate new participants and value-added services through open APIs. As well as creating opportunities to scale, emerging technologies such as robotic process automation (RPA) can be applied to streamline an entire market. Take syndicated lending as an example.
Historically manual and fraught with inefficiencies, today only around 0.1% of loans are traded electronically. Yet the sector has a compound annual growth rate (CAGR) of notional syndicated leveraged loans outstanding since 2010 in excess of 10%, which is why digital marketplaces that connect the lending community (agents, bankers, buy-side and sell-side) with a single source of permissioned data sharing, can help digitise information and reduce processing lags. Through automation, end-to-end transparency can be achieved – a development well overdue in the market.
Syndicated lending digital marketplaces like this let agents auto-publish to multiple lenders, reducing queries and operational costs, within the safety of a secure, private network. Lenders can access real-time credit information, accrual balances, position information and transaction data for multiple agents through a single portal, reducing operational risks and manual processes. Both benefit from the convenience of automation and an immutable transaction record spanning the lifecycle of the deal, and this creates the perfect conditions for borrowers to access a broader, deeper and efficient liquidity pool, creating better outcomes for all parties of the market.
Creating a multi-stakeholder mortgage marketplace
A second example of how digital marketplaces foster growth and innovation applies to mortgages. Compliance and efficiency, at speed, across the value chain have historically been hard to balance – again reliant on manual process and signatures. A marketplace model digitises the entire origination to issuance process and allows for the exchange of bi-directional data for better dynamic pricing. Value-add services can be rapidly integrated for market participants – for the consumer, insurance and asset valuations or know your customer (KYC) services, for the broker, services like point-of-sale mortgage application software that help them expand their business. This network benefits all parties: lenders access a wider portfolio of brokers; brokers get choice and competitive rates; service providers access a burgeoning ecosystem with enhanced and compliant flow of business; and borrowers benefit from faster loans, connected services and the convenience of it all in one place.
Marketplaces: reaching the critical mass
The biggest challenge in creating a marketplace, from a strategic perspective, is reaching the critical mass at which the “network effect” takes over. To displace a historic, dominant model of one-to-one relationships requires ingenuity, trust and technological expertise.
Having open technology capable of rapidly integrating new partners via open APIs is a key component of success, as is maximising the volumes of interactions across the marketplace to make the business model viable and sustainable.
For those brave enough to take on the vision of transforming entire industries, the potential for marketplaces as an enabler of growth, scale and diversification into new territories and markets is uncapped. And when fully operational, the market becomes more efficient and the marketplace becomes the facilitator, the integrator and enables the participants to innovate and drive efficiency – effectively becoming the “homepage”. As anyone in software will tell you, “everybody is trying to become the homepage.”