Risktech start-ups: survival of the fittest?

A new breed of vendors could change the face of risk management – if they can hang around long enough

In 1962, US physicist Thomas Kuhn challenged the belief that scientific progress develops in a linear fashion, instead identifying periods when a field of knowledge is thrown into crisis – old ideas and new fight for acceptance and, eventually, a fresh paradigm emerges.

The concept is used today to describe any upending of an old order – for example, by some of the 15 fintech start-ups profiled by Risk.net this month, which each believe they have a better way to solve a specific problem in risk management.

They may be right. But in a Kuhnian paradigm shift, the struggle is primarily between different ways of explaining the world. If a persuasive theory is accompanied by replicable experiments and robust evidence, then it should eventually displace an old way of thinking.

In contrast, the start-ups’ hoped-for paradigm shifts will only come about if their ideas can be effectively turned into products and sold. More to the point, they have to be sold to traditionally slow-moving customers, which have become increasingly nervous about third-party risks.

Take Financial Network Analytics (FNA), a firm that is looking to employ network theory techniques to help central banks, clearing houses and other intermediaries better use the vast wealth of data they hold to model market interconnectedness, in order to better spot – and head off – build-ups in counterparty exposure or operational risks.

On paper, a solution that helps firms make better use of what they already have sounds like a no-brainer; but several would-be buyers of the firm’s technology tell the firm they can’t make use of most of the advanced analytics FNA’s platform offers, partly because the data required is not collected cleanly enough. Others question whether there is enough budget in the official sector for even successful vendors with simple, low-cost offerings to scrape a living.

Often, those firms that have gained a foothold and secured bank funding aren’t looking to upend the system; for instance, a procurement trend many firms have benefited from is banks’ decisions to buy, rather than build, solutions to meet specific pieces of regulation. Banks are increasingly open to partnering with external providers for the delivery of cheaper solutions for computationally heavy regulation such as the Fundamental Review of the Trading Book, says Anthony Pereira, chief executive of risk data aggregation firm Percentile.

You can’t blame the firms for talking up their offerings – unlike a revolutionary shift in science, none of them will get the chance to change history without talking big, and being bloody-minded.

Z-Risk Engine’s Scott Aguais puts it like this: “What I have is the next paradigm. We’re ahead of the curve enough that people haven’t woken up. If most banks aren’t ready, all we can do is keep publishing our thought leadership and improving our solution.”

Editing by Tom Osborn