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Financial service leaders see surge ahead for Boston’s fintech cluster

Jun. 9, 2016 | News Article

Financial service leaders see surge ahead for Boston’s fintech cluster

Other regions may have a head start in building a thriving fintech cluster, but Boston’s expertise in financial services — and its collaborative mindset — gives the region the ability to not only catch up, but surpass them.

That’s the top-line takeaway from a roundtable held earlier this month that included leaders of the local financial services industry. The event is a precursor to a larger one focused on fintech planned for June 30th and organized by the Boston Financial Service Leadership Council.

Attendees at the roundtable included representatives from local big banks like State Street, smaller ones like Eastern Bank, and mentors in the area’s thriving startup community. The fact that they came together in the first place for an in-depth discussion of how to harness the groundswell of fintech activity sets the Boston area apart from New York and the West Coast. As one attendee observed, startups in San Francisco are mostly looking to be acquired, while those in New York typically don’t talk to each other, so Boston’s willingness to work together to grow its presence presents a major advantage.

Back-end applications will come to the fore

But in order to do that, Boston’s financial services ecosystem will need to figure out exactly where the biggest growth will be in the next five to 10 years. Certainly there are applications of cybersecurity in the online financial world, as well as in equity analysis — two of Boston’s strengths. But perhaps the biggest point of consensus was that while much of the innovation in the field has focused on front-end, or consumer-facing, technology, the biggest opportunities in the future will be in the “back end” — the underlying, structural elements of software that can automate much of the behind-the-scenes work critical to financial services. The early fintech companies backed by venture capitalists — which formed the basis of the West Coast fintech scene (think PayPal and NerdWallet) — revolved around payments, banking and new debit cards, for instance — typical “front-end” applications.

But according to experts, that represents the easy stuff, merely scratching the surface of the potential innovation of fintech. The real costs and workflow issues in the financial services industry are all in the back end. Boston — with its strong buy-side presence and academic roots — is perhaps the best-poised region for innovations there in the coming decade. Already we’re seeing equity-focused startups like Quantopian, a crowd-sourced hedge fund, and portfolio analysis firm Elsen, addressing the deeper issues of finance. The challenge could be in “unbundling” front and back end. Some experts pointed out that real disruption in the back-end financial services would create opportunities for totally new front-end applications.

Blockchain, machine learning present opportunities

Blockchain also holds great potential. The most famous application of that technology — the digital currency Bitcoin — continues to flounder, and the general consensus is that the distributed database approach is still years from true disruption of current processes. Many see the fraud-proof nature of blockchain as having applications in the fields of health care — including patient records — and IT that can automate the processes between companies and shareholders. But most agreed that a wait-and-see attitude is the best, since there are enough other challenges to focus on for the present.

More promising in the next few years, perhaps, is in machine learning, or artificial intelligence, and getting data across multiple organizations in a way that doesn’t give away secrets. New technology is helping improve financial services by making it safe and accessible, but what’s happening in equity markets and the stock exchange will transform much of the world. That might not happen for a decade or so, but investing in it now will help shape it.

Better leveraging Boston’s fintech talent base

Much of the discussion was around the theme that Boston still doesn’t do enough to leverage the talent at its universities. It’s a view that’s been around for several years now, but attempts are underway to address it. One example is the two-year-old Fintech Club at MIT, and the Martin Trust Center for MIT Entrepreneurship. Attendees said the club has been growing with annual conferences, and has even developed a course called fintech Ventures in which speakers talk about different vertical applications of technology. The members are a mix of business and computer students, and some emphasized the need to attract the computer science and technical students who would otherwise leave the state to work at Google, Apple and other Silicon Valley firms that are perceived as tackling some of the world’s most exciting problems.

Yet, the barrier of non-compete agreements in Massachusetts continues to drive talented employees to move to California, where such agreements are banned. There was acknowledgement that it’s a big problem that is now being debated at State House, and attendees were encouraged to make their voices heard in an effort to restrict how non-competes can be used here.

Those who collaborate will win

The desire to “create an ecosystem” in Boston’s fintech scene — partnerships with emerging companies, established financial firms and universities — was echoed several times in the discussion. Just as Mass Insight’s Advanced Cyber Security Center was envisioned as a “team sport” approach in which companies band together to defend against common attackers, the fintech community can be seen as one that will benefit from cooperation between groups that might otherwise be competitors. The sharing of financial data — the main idea behind the formation of the Fintech Sandbox — can help address the bottleneck effect faced by many startups which typically need a longer lead-time the other software startups in order to launch their products.

In another decade, Boston’s major competition in fintech many not be New York and San Francisco: International cities like Barcelona, Germany and London, as well as Shanghai, Delhi and Mumbai, are all working to establish their own fintech clusters, and many of the students at Boston’s universities may opt to move back to those cities and countries unless Boston builds its own cluster the same way it’s done in the life sciences. As we bring small and large companies together over the next 10 years, one speaker said that here in Boston, we’re in “the frenemy stage” — but one that can benefit everyone.

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