Financial Operating Systems

Abstract

One of the most consequential and unexamined developments in global finance has been the recent emergence of massive concentrations of financial technology under the control of individual firms. These financial operating systems are, like computing operating systems, relatively inconspicuous yet extraordinarily powerful. They already dominate the world’s $50 trillion investment fund industry, where they play a critical role in asset management for pensions and institutional investors, and their ambitions are far greater.

A harbinger of their growth is a firm with massive size and scope that remains virtually unknown in the United States. China’s Ant Financial – an affiliate of Alibaba – is fifty percent more valuable than Goldman Sachs, and its payment system, Alipay, is the world’s largest, hosting more than 1 billion clients and executing more than $16 trillion in annual transactions, the equivalent of China’s annual GDP. At the same time, $20 trillion of assets, equivalent to 10% of all world's financial assets, depend on Blackrock's risk management system Aladdin.

Large U.S. financial institutions such as Vanguard, Fidelity, J,P.Morgan Chase, and Goldman are working hard to emulate Ant’s and Aladdin's scale, to counter the efforts undertaken by dynamic FinTech start-ups and defend their very existence in light of Ant Financial's, Blackrock's and other BigTech's scale.

Despite intense scholarly focus upon FinTech start-ups, we argue that these financial operating systems created and operated by incumbents and BigTech firms will ultimately have far greater societal impact. Indeed, their quite rise constitutes a powerful effort by established financial houses to strike back against the splashy disruption of FinTech start-ups. We argue that the existence, growth, and success of Financial Operating Systems explains the ongoing concentration in the asset management industry that has so far been analyzed primarily from a corporate governance perspective.

We identify the economic reasons for the dramatic ascendancy of these systems and the legal implications arising from their possible failures and successes, specifically analyzing national security, antitrust, cybersecurity, and related theoretical issues accompanying the rise of these financial leviathans.