Waters Wrap: Are consortiums more viable in today’s tech environment?

Rishi Nangalia and Nilesh Nanavati, founding partners of advisory firm OpCo, say that while consortium projects are popular in the capital markets, most fail to get off the ground. Can that be prevented?

Credit: Tatebayashi Kagei

The cynical view—and often my view—of consortiums is that they come together because banks and buy sides take issue with a set of fees they must pay. To lower those fees, they collaborate to build a competing platform. Eventually, consortium members cash out their positions to make a buck, but then start complaining again when fees rise … which leads to a new consortium. But has technology evolved to the point where, rather than building a new company or platform, firms just need to embrace interoperability, API development, open-source tools, and low-code engineering, rather than try to reinvent the wheel?

But it occurs to me that maybe I’ve viewed this all wrong. Maybe these advancements make consortiums more viable. Innovation discovery is becoming increasingly complex due to the breakneck pace of technological evolution in the capital markets. New fintechs are popping up all the time because as-a-service and managed-service models make it easier for a company to get up and running more quickly. On top of that, regulatory changes, market structure shifts, and evolving investment philosophies make going it alone less appealing for certain asset classes or non-alpha-generating needs.

While I lack hard evidence of this, it does seem that the consortium model has become more popular over the last decade.

For instance, we’ve seen the launch of Investors Exchange (IEX) and Members Exchange (Memx), the former being a consortium of buy-side firms and the latter mostly consisting of sell-side heavy hitters. Octaura, formerly known as Project Octopus, came together through Citi and Bank of America (BofA) combining members’ collateralized loan obligation (CLO) trading efforts into a new multi-bank trading platform, focusing first on syndicated loans.

There’s also Versana, which is doing something similar for syndicated loans. And Societe Generale is leading a group of banks that seeks to address problems in the areas of post-trade and KYC.

Additionally, the top three trading venues in fixed income are teaming up to create a European consolidated tape for bonds. There were several blockchain consortiums announced—most of which have disappeared into the ether. A group of banks were recently exploring the idea of creating a competitor to Ion Group, though it sounds like that hasn’t gone anywhere. And, of course, there are Symphony, Neptune Networks (formerly Project Neptune), and FXSpotStream, among others, that have come together over the last 10 or so years. I’m sure I’m missing plenty more. In Asia alone, there’s a litany of consortium projects that have popped up: Genesis 2.0 for ESG; Japanese banks coming together on digital currencies; a trade-finance platform in Hong Kong; a responsible AI consortium in Singapore; a payments platform in Australia; and, also in Australia, a cyber security initiative.

Consortiums in finance are also nothing new—Nasdaq, Ice, Markit, Tradeweb, MarketAxess, to name just a few, all began as consortiums—but is there reason to think they are becoming more popular? Rishi Nangalia and Nilesh Nanavati believe they are, which led them to create OpCo.

The advisory firm’s objective is to bridge the gap between incumbent banks and broker-dealers on one side, and the fintech community on the other—something it calls consortium formation. “The idea around consortium formation is, when banks get together—and there have been a number of very successful consortiums—some of the processes are pretty duplicative and as a result there’s a lot of inefficiency and redundancy,” says Nanavati, who has spent over 20 years in the financial technology space.

After a consortium idea is created, a lot of infrastructure must be put in place—whether that means bringing partners together or building the HR function for the new entity.

“Banks have to collaborate for two simple reasons: One is the onslaught of innovation and the tech vendors eating their lunch,” Nangalia says. The second reason is that there’s a battle over tech and data talent that’s only getting more difficult by the year.

OpCo has been working with several consortiums to help get them off the ground. Nanavati says the company looks at consortiums from two perspectives: pre-new company formation and post-new company formation. For the former, it’s all about bringing the banks together to make sure there’s a business plan formed and getting to a unified vision of what they’re going to do, how they’re going to do it, and how much money they need to fund the company.

Post-new company formation looks at the operationalization that needs to be done: office space, basic IT, HR—“everything that is required to create a living, breathing company,” he says. “It’s only that time when you can actually position this business so that an industry CEO or veteran can come in, or a management team can come in and take on whatever milestones they’ve set for themselves.”

Since the same banks will often be involved with multiple consortiums. So to make sure the projects don’t stall, OpCo looks to make sure that certain processes aren’t being duplicated, while making sure regulatory aspects, especially around anti-trust laws, are being adhered to as the company is formed.

The problem in the past has been that for consortiums that fail, it’s usually because the initial excitement and momentum stall. For every Nasdaq or Tradeweb, there’s a long list of projects that dissolved. But consortiums are seen as a better step toward innovation because the industry is becoming more complex and regulated, says Nangalia, who himself was the founder and CEO of Redi Technologies, an industry-owned fintech consortium that was acquired by Thomson Reuters (now Refinitiv).

“What makes them more viable—or more discussed, now—is, previously, you needed a lot of things to happen for something to succeed. In the new world, you don’t need that many things to happen for something to succeed. Startups and Silicon Valley have proven that 10 people in a garage can build massive companies in five years. Conversely, it’s become much harder to do things at banks, which have gone through much more regulation, much more cost cutting, and much more bureaucracy. The most senior people at banks can’t get things done because they have to jump through 85 hoops.”

Another thing that has changed over the last decade is the banks themselves have set up incubators, innovation labs and venture capital arms that focus on fintech innovation. As a result, they’re getting more hands-on with innovative startups. From there, they can see which companies might have a product that would be appropriate to tie together a group of banks.

“The banks now have innovation folks sitting with the business-line management folks,” Nanavati says. “There’s an exhaustive set of activities going on. Consortiums remain one mechanism of that innovation.”

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