Boston Financial Services Leadership Council

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Boston Finance Innovation: The Fintech and Data Analytic Play

Apr. 21, 2016 | News Article

Quantopian is pioneering the idea of a crowdsourced hedge fund, an approach that rewards coders who submit market-beating algorithms. The 40-employee firm has raised $24 million from investors and has started putting some of that money to work using the best algorithms tested on its platform.

Quantopian, founded in 2011, represents the growing reach of Fintech in Boston, home to dozens of other Fintech startups that are gaining traction. Together with the R&D labs of large financial institutions and Fintech incubators, Boston is accumulating a critical mass of innovation and talent to claim leadership as a Fintech center. But its many disparate assets haven’t joined forces yet to make a forceful case.

More promotion needed
“I think we need to be better at both the press and the promotion of the sector,” says Dan Dunn, vice president of product and marketing at Quantopian. “We’re building companies left and right here in Boston, but I don’t think we get the same credit for it.”

Considering the success of Quantopian and Boston Fintech peers Flywire, Paydiant, Kensho, Loop and LevelUp, Boston deserves to be recognized as a Fintech hotspot on par with New York and Silicon Valley, Dunn says.

More “collision points” and networks
But bolstering the sector will require more than stronger promotion, says Jean Donnelly, executive director of the Fintech Sandbox, an incubator for startups. The Boston area has “an amazing ecosystem in terms of the skills of the people coming out of the universities,” she said. But what it could use is more “collision points,” or places for investors, entrepreneurs and other players in the Fintech world to meet.

There’s certainly more “collision” potential in Boston Fintech. The intersection of Boston’s startup culture with some of the biggest names in finance — including State Street, Fidelity, Liberty Mutual, John Hancock and Putnam — makes the area a natural to harness the fast-growing Fintech market.

VC funding for Fintech outpaces Biotech
Worldwide venture capital investment in Fintech was a record-breaking $13.1 billion last year, according to a report by KPMG and CB Insights. That’s more than double the previous year, and significantly more than the $9.6 billion in VC dollars that went to biotech, a sector for which Boston is far better known.

Data sharing is critical for start-ups
Kickstarting the cycle of success the area needs to excel in the field was one reason the Fintech Sandbox was founded a year ago. Donnelly says that the global nonprofit, which is largely virtual, helps address one of the biggest hurdles any Fintech startup needs to overcome: Access to financial data.

Donnelly says the data needed to test out new ideas and ways of innovating the financial markets is expensive. “These companies and startups don’t have access to data. There’s no open source for access to data,” she said.

So her organization, through partnerships with Thompson Reuters and S&P Global Market Intelligence, and more than a dozen other entities, gives that access to startups for six months.
Donnelly says that much of the buzz in the Fintech space has historically been around consumer-facing mobile apps, especially ones (like Robinhood) used for trading.

Boston’s sweet spot: Data and risk analytics – and cybersecurity
But in Boston more startups are focused on developing software to analyze the capital markets that are aimed at data scientists and buy-side analysts. Kensho Technologies in Cambridge, which makes software to model the effects of world events on the stock and bond markets, and Boston-based Elsen, which makes a fast computing platform for hedge funds and banks, are two recent examples of such companies. Boston’s concentration of cybersecurity R&D and academic expertise provide a foundation for the data ecosystem.

Boston’s large firms are major IT players with a leadership role to play
Boston’s large financial institutions are busy innovating internally and also want a front-row seat to startups’ innovations. Fidelity, for example, is a supporter of the Sandbox and also runs the Fidelity Center for Applied Technology (or FCAT), including its technology lab. Digital Credit Union has an incubator, the DCU Center of Excellence in Financial Services, with physical offices on Atlantic Avenue. State Street Bank is building an innovation team, and Thompson Reuters is building out Big Data labs, including one in Boston.

Consumer banks also are feeling the urgency to innovate. Dan O’Malley, the chief digital officer at Eastern Bank, says that in 2014, the mutual bank saw the need to evolve with the changing financial landscape. It established Eastern Labs, an internal team responsible for developing technology for use by the bank that could be spun out into other financial institutions. The group enjoys full access to the bank’s resources, leveraging them to develop products and platforms not only for customers, but also for bankers.

“It’s necessary for Eastern to dedicate resources to the Fintech sector,” he said. “As a community bank, Eastern needed to figure out a way to remain relevant to its customers, while still providing the individualized customer service.”

The first problem tackled at the Labs was business lending, and O’Malley says the result was the Express Loan platform, which provides customers with a small business loan in less than five minutes — from application to funding in their account. Launched in the past few months, the pilot program more than tripled the amount of lending to small businesses, says O’Malley.

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