Battle of the buzzwords

Blockchain has become the industry's latest buzzword, but how can we really make best use of new technology?

One can hardly open up a publication or scan a conference agenda without instant experts on Blockchain offering their learned advice. Blockchain is a fascinating development. It, alongside a lot of Fintech developments, should have a key role in our future. But it is drowning out two fundamental changes in the market which may have greater impact and are prerequisites to its success. The first is overcoming the inherent inefficiencies of current market practices, where the solution is not technological advance but common sense. The second is the imperative to re-engineer the securities IT landscape to eliminate useless duplicative effort; and here Blockchain may have a meaningful role.

I can recall buzzwords of the past, such as cloud computing, modularity, outsourcing, offshoring and others. Some have proven valuable. Some have been disruptive and costly. All have one fundamental characteristic. They are not the unique solution to the fundamental industry problem of excessive cost and risk of production, but one of the building blocks to overcome it. I suspect Blockchain and many of the other Fintech elements should be seen in the same light.

Some years ago, as the industry crossed the borders from manual processing to heavy duty automation with giant IBMs, ponderous Tandems and other famous names, one expert opined that in future we would need one person per billion dollars of assets under custody or administration. Another saw Microsoft or one of the then emergent technology companies, as the Fintech of its day, which would take over the bank custody and administration role. Fintech will undoubtedly have a greater role in our business environment than the technologies of the past, but, I suspect, in facilities provision and not regulated businesses. Crossing that Rubicon would totally change their business model; and most likely for the worst.

But let me focus on the two core issues I have for the industry’s survival. How should we tackle them? For inefficiency of process, and especially that mountain of flawed data, will not be eliminated by a new box of technology tricks. And eliminating duplicative processes needs a mind-set change before a technological helping hand.

There are a series of serious flaws in global market practice. The most glaring inefficiencies are at corporate, regulatory and governmental level. At corporate level, inspired by prophets of judicial doom amongst the legal fraternity, are the deniers of the feasibility of electronic data transmission in standardised formats for corporate events and other company to investor communications. At regulatory level, inspired by nationalistic and even sectarian tendencies among the world’s regulators, is the absence of standards for the largely similar dataset needed across the world’s regulators. IOSCO and others may opine learnedly about the need for information and the importance of global cooperation but its members collect a mass of data in proprietary formats and regulator specific business definitions. This has a high cost and risk of error for the investor and their regulator as well, and, for systemically important entities, results in a serious degradation in the quality of regulatory oversight.  And, at governmental level, we see common principles, even within the EU, becoming unique local interpretations, most usually to create a barrier to competition in financial services. We see demand for notarised paper based information, often structured around local legal standards and not those of the impacted non-local target entity. We see a myriad of treatments of tax reclamation, with many rules reflecting governmental intent to void the benefits of the tax treaties accepted.

Blockchain is lauded as the future source of the single incidence of data for multiple users through its distributed ledger technology. It undoubtedly is a sensible technological platform for such a facility but some of the flaws in global market practice need to be tackled first or we will end up with a new shining box being fed a lot of garbage in the form of irreconcilable and inaccurate data. Most global organisations, some even because they do not have the right structures in place to overcome data protection rules, do not have a single incidence of their basic KYC and client standing instruction data. The number of dormant accounts in banks is monumental, reflecting changes in client corporate structures, erroneous set ups and a whole range of client or bank errors. Names and addresses contain often errors that stretch credibility. Gaining a single data set within organisations would be a great step forward. And, with the growing demand for designations across the market at CSD and other infrastructures, that standardisation needs to cross corporate barriers and follow global standards. Many of the tools are there with developments such as Legal Entity Identifiers or the SWIFT KYC utility. Securities numbering remains an area of flawed good intentions with identifiers being a welcomed competitive barrier for some and a headache to align between trade and post trade for others. The cost of cleaning up delinquent data should not be underestimated. And, unfortunately, it is not a mechanistic exercise but one that needs client and supplier cooperation with consistency. And, as regulators tighten the rules and increase the penalties for poor data, it will become a race between the viability of cleansing the data or the lesser challenge of moving groups of delinquent clients out of the regulated banking and financial segment of the market and into the less demanding shadow banking sector or even worse.

The path to Fintech improvements to our current and “not fit for purpose” infrastructures is going to be relatively simple by comparison to the political, legal, regulatory and cost implications of cleaning up the data and adopting common global standards. Unfortunately both are needed if we are to move from our current neanderthalic processes to something closer to an automated nirvana.