he financial technology (fintech) phenomenon first started to evolve in Tthe capital markets (CM) industry more than 40 years ago. Today, accelerated both by the electronification of trading in the 1990s and the subsequent thrust of the entire financial services industry toward digitization, fintechs—which we define as firms that use innovative technology at scale to either enable or compete with other financial institutions—have experienced exponential growth in the CM domain. The most prominent CM fintechs have been strongly supported and engaged by the CM ecosystem, which includes players such as investment banks, custodians, ex- changes, clearing-houses, and CM-focused information service providers. Such play- ers have been, and will remain, best positioned to pick the most promising fintechs for potential collaboration. Yet despite rapid growth, CM fintechs have been attracting less than their fair share Despite rapid growth, of venture capital (VC) funding. This shortfall is partly due to the highly specialized CM fintechs have and regulated nature of capital markets, which may hinder outside investors. In- been attracting less deed, when fintechs are backed by incumbent banks, they attract greater funding than their fair share and mature more quickly than when they are backed solely by VC firms. Incum- of VC funding. bents that invest actively can shape business models and help fintechs evolve into collaborative suppliers rather than disruptors. Moreover, the funding that CM fin- techs have received to date has been heavily focused on front-office initiatives with- in execution and pre-trade. Funding for post-trade activities has been much more modest, with investment concentrated in a select number of fintechs, resulting in the highest average ratio of funding per company. Simply put, fintechs focus on creating new value propositions or improving existing ones. They help build capabilities that can enhance client relationships, reduce costs through automation and simplification, and facilitate regulatory compliance. They also enable disaggregation of the value chain as they become more embedded in the supply chain. Nonetheless, in order for the fintech boom to realize its full potential, a number of barriers must be overcome in the way that fintechs relate to investment banks and the CM ecosystem as a whole. These hurdles exist in the areas of simplifying IT ar- chitecture, developing industry standards, improving collaboration among players, and mitigating the risks of working with vendors, among others. Moreover, inertia on the part of incumbents can have a dire consequence: the inability to compete with new entrants that use cutting-edge technologies to reverse banks’ traditional The Boston Consulting Group 3