Fintech creeps up on the capital markets

By:
Peter Lee
Published on:

The application of fintech to wholesale banking is, to date, less clear than in retail financial services, where peer-to-peer lenders, start-up remittance companies, crowdfunders and robo-advisers are quickly picking up market share from the incumbents. It is more likely that fintech startups will collaborate with and sell to the incumbents in capital markets than disintermediate them. But they will still transform those markets and the business leaders.

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Origin, a new central market place for issuers of debt private placements to post funding terms to intermediary banks, will go live in November, marking a rare foray for a fintech firm into the heart of the primary capital markets. 

When Euromoney catches up with Raja Palaniappan, co-founder and chief executive of Origin – and a former corporate bond and derivatives trader at Lehman Brothers, Nomura and Credit Suisse who has been building his new business since 2015 – he is discussing final terms with the last of five banks who will debut on the platform at its now imminent public launch.

These banks will take the target funding terms in standard tenors and structures published by 21 regular issuers of private placements off medium-term note documentation (split evenly between supranational and financial institution borrowers of various sizes), seek to match those terms with the banks’ own investing customers’ requirements and so originate new deals typically of a size anywhere between $25 million and $150 million.

Although individual deals are smaller than in the benchmark public bond market, in any year private placements in aggregate can account for up to 30% of all funding raised in the debt capital markets.

For debt issuers, Origin offers one place to display standard terms to many dealers, instead of firing off separate spreadsheets to all of them by email or other messaging routes. They can update those terms quickly, simplifying communication requirements, while controlling which dealers on the platform see their terms. Ultimately Origin will allow issuers to benchmark borrowing rates against peers in a big funding market for which no central source of such primary market data yet stands. 

For dealers it offers a central point of access to all documentation and information on a large class of important issuers, as well as real-time alerts of changing funding terms and associated swap movements.

It is an efficiency play, a way for dealers in particular to reduce the number of hours devoted to fairly mundane aspects of issuer coverage and processing of smaller transactions that are increasingly standardized.

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Raja Palaniappan,

Origin

Palaniappan cannot yet disclose the names of the first issuers, which include some of the biggest and most frequent borrowers in the global debt markets, or the dealers, a mix of mainly large European and US investment banks. 

But his excitement is obvious. Having conceived the idea for Origin in 2015, bootstrapped it, refined its business model, raised additional funding and been through the Barclays accelerator, he has just seen it generate customer revenue for the first time from its pilot users.

Three aspects of the Origin story, in the context of what fintech means for the capital markets, appear quite striking. First, without wishing to rain on Origin’s parade, it does not appear to be a revolutionary business concept imminently set to overturn the entire structure of the debt capital markets. 

In retail financial services, fintech newcomers have tended to take on the incumbents and seize customer business from banks with poor legacy technology, bloated cost bases, reduced leverage and higher weighted average cost of capital. 

But this is not happening in capital markets.

Origin may smooth out the workflows and bring some transparency, but it does not seek to overturn market structure or disintermediate any of the core players.

Second, no one else seems to be trying to do that either, even though the technology has clearly existed for many years to connect the world’s biggest issuers of standard, plain vanilla debt securities directly to the biggest investors. Investment banks have been fretting about disintermediation since the late 1990s. But, unless they blew themselves up in the financial crisis, they are still with us. The newcomers have been boutique advisory firms, often monetizing the relationships and insights of a select handful of industry specialist investment bankers. Rarely are these tech-driven.

Various trading platforms have been set up to match portfolio managers seeking to move inventory directly between each other in the secondary credit markets, where traditional bank dealers are no longer willing to take positions. But this has not yet impacted capital raising. 

By creating a platform that makes it easier for banks to deliver their investor demand to disparate issuers, we can help them to reclaim some of the profitability inherent in their core franchises. 
 - Raja Palaniappan, Origin


Few have even got as far as Origin. Toronto-based Overbond raised C$7.5 million ($5.6 million) in seed funding earlier this year to build a cloud-based, digital platform for corporate issuers, dealers and investors in the primary bond market in Canada to exchange deal messages previously sent manually and to improve price discovery. But it has not made much impact beyond Canada. Few of the DCM bankers Euromoney speaks to in New York and Europe have dealt with it.

Thirdly, at a time when venture capital investment is still pouring into fintech firms operating in peer-to-peer lending, remittances, payments, equity crowdfunding and even robo-advisory, investments in fintech firms focused on capital markets appear small.

When Euromoney spoke to Palaniappan in March this year about the creation of Origin, it had then raised less than £1 million ($1.2 million) in start-up capital. Buoyed by recent receipt of customer revenue, he is taking in some more funding now, but suggests this is more the building of a prudent cushion that is not taking up too much management time. It is certainly not a life-or-death effort to complete a big funding round crucial to building the company.