The Financial Conduct Authority in the UK has expressed concern at the industry’s low level of margins and cited this as one reason for an underinvestment in IT.
I suspect they are right as the biggest costs of our industry are people and technology. If there is a squeeze, you really only have a major effect by cutting headcount or IT development.
Having listened to many presentations on the new world of technology, I suspect there are four major reasons, other than funding, for such underinvestment. First, there is a lack of clarity around technology strategy. I sense a fear of the inevitable truth that we have reached a new era where automation is making a major advance; solutions therefore need to be revolutionary. Second, I see major problems for our industry as it struggles to understand how the new technologies blend with its legacy platforms. Third, there is unease about the impact of the introduction of valuable existing tools such as cloud, robotics or genuine data curation and digitisation. And, finally, I see a continued belief that traditional core competences are valuable differentiators and this prevents shared solutions and spread costs.
Are the new technologies so disruptive that revolutionary solutions are imperative? Other than the move from paper to digital, historical technology changes have been evolutionary and incremental. But we are now faced with fundamental change where legacy platforms could be incompatible with the logical new IT architectural landscape. Robotics and artificial intelligence should allow one to sweep away swathes of the physical back office, both at home and offshore. The reality is that much activity is already automated at the point of capture through to execution and settlement; the exception process that is costly is a logical candidate for artificial intelligence. Securities services are not brain surgery and most issues are repetitive and have limited option solutions.
But how would this new world blend with the existing one? On current understanding, we need a transition, but a speedy one, to avoid duplicative costs. The new technology needs to accommodate, or preferably absorb, legacy external environments, as well as enable the new and more cost and risk effective ones. This is going to be a risky transition and it is likely that several players will fail and exit, whilst the laggards will be left in a technological and cost rut to be decimated by more cost and process efficient competitors.
The reality is that, if we assume blockchain re-engineers the asset list or portfolio, and finds a solution between its current competence as a mutual record of a transaction through to becoming a mutual understanding of an asset list or portfolio, then we re-engineer the core of all our IT platforms. We need to fast track to their replacement rather than co-exist with multiple alternative data structures. Duplicate cost bases add no value and a two-track solution, longer term, reduces pressure on parties who prefer to defer their investment.
It is not only the technology that needs to change but also the culture of the industry. Cloud computing and shared solutions, perhaps by limited collective partnerships, especially among those trailing the top three global asset gatherers, are logical, if hard to stomach by the well-entrenched parochial players in the industry.