Economies of scale may bring down pricing, but they may also stifle innovation.
The 1990s were the decade when a thousand flowers bloomed—at least when it came to risk technology. A dizzying array of smallish companies that started out turning quirky theories into useful analytics for banks began pushing into the asset management and, ultimately, the corporate cash and pension markets. But in the past decade, the risk business has seen a great deal of consolidation. Often, the resulting giants say they can offer soup-to-nuts solutions—including in some cases integration with their own treasury management systems—for less than it would cost for a corporate to investigate the market and cobble together a bespoke system. But officials at start-ups today say this development may make it harder for them to get in treasury’s door. And if they do offer better mousetraps, that would be bad for companies and the financial system overall.
Take the marriage of MSCI and RiskMetrics, announced earlier this month. MSCI, formerly the indexes arm of Morgan Stanley, was spun off by the investment bank and subsequently purchased Barra. The latter company is one of the groundbreakers in collecting and analyzing stock characteristics, or ”factors”—growth versus value and so on. From its vast historical database of factors, it created a predictive risk management tool that became popular among institutional investors like Putnam and CalPERS.
MSCI is now going up the aisle with RiskMetrics, originally JPMorgan’s risk analytics arm, which has been another major innovator in the space since the 1990s. But RiskMetrics purchased ISS in 2006, and that corporate governance advisory (or gadfly, depending on who you ask) business puts it at odds with some corporate boards.
Now, they are glomming MSCI, Barra, RiskMetrics and ISS together. Granted, this business is primarily targeting institutional investors and banks. And some such merger-spawned entities, like SunGard, have still succeeded in building their corporate businesses, but mainly on the back of core transaction systems.
But this is not a one-off deal. Once-independent risk innovators Algorithmics and KMV now toil under Fitch and Moody’s, respectively. And neither parent is looked upon kindly by treasury, let along asset managers, these days.
The big worry is whether in an environment increasingly dominated by big risk tech conglomerates, small, innovative game-changers will get the resources and soapboxes they need to make crucial improvements to the world of risk analytics. The standardization of products—in the worst-case scenario, their ossification—typical of integration into product offering suites may make R&D at big vendors less adventurous. And with treasury so stretched for time and budget, up-and-comers, even those with really good new ideas, may have a hard time getting in the door.