Blue sky thinking post-Sibos 2020

Following the conclusion of Sibos, securities services veteran John Gubert takes us on a journey through an assumed post-COVID world in 2021 or later, painting a picture of a complex and transformed industry.

Sibos is usually a great opportunity to look to the future with blue sky thinking prevalent, especially in late evening informal discussions. Alas, virtual Sibos removes this opportunity for such dialogue, but it can still stimulate some out of the box thinking.

Let us imagine we are in 2021 or later. The UK has left the EU with a Canada-style arrangement, limited equivalence for the financial sector and has just announced the launch of negotiations for a UK-EU “deep and meaningful” new trade deal. Six months of partial social paralysis ended in April 2021 and, at last, with a COVID-19 vaccine available, our enterprises look to the future. And they realise quickly that society has changed; the old ways will not work. The environment is tougher with global scale, regulatory arbitrage and fleet of foot being the driver for competitive advantage in much of the financial world. The old model is broken; fine tuning will not be enough, traditional centres of excellence are hide-bound by legacy and a digital world demands radical solutions.

People will need to change and the change will not be comfortable. Cultures need to undergo revolutionary change. There will be hot desking, hybrid working between home and office and globalisation of labour. Home working and hot desking will be enterprise led; rather than at the discretion of the employee. Hybrid working will require increased digital communication and will create a revolution in internet security. Globalisation of labour will prevail with more roles being subject to competition across firms irrespective of geography, as home working and changed communication methods create a paradigm shift in key executive selection. Such moves will drive an equality culture by destroying glass ceilings and national barriers. The meritocracy will be the champion of this changed world. Admittedly, as in any period of change impacting people, there will be resistance, from the Luddites through to the traditionalists stuck in the permafrost of the past. But overcoming them will be a key marker in distinguishing between the survivors and the rest.

How will this new world communicate? It is almost irrelevant, other than time zone considerations, whether a key executive is located in London, New York, Hongkong or Mumbai. In a pandemic, and planning must cater for further ones, all are housebound and distance otherwise is merely an issue of timing for periods of free movement. Effective teamwork will become more critical in this new world. There has to be a move away from the mega meeting involving every single stakeholder in a decision tree to more streamlined, delegated and empowered groups that can take decisions, using modern digital communication technology as their critical tool, for the firm as a whole. Once again this is a major shift from collective management to delegated and directional management but collective management has become, purely because it is unwieldy, a barrier to progress. Teams cannot live by formal communication alone and planning sessions in person will be imperative, at times involving multiple teams and disciplines, to ensure that there are interpersonal ties between team members and their colleagues and not just professional ones. This will be a challenge and the new age will be the age of the communicator and not the age of the isolationist.

The technology world will change. Technology is becoming fragmented with new applications undertaking anything from meaningful to micro roles. Data is still a mess, despite better consolidation within businesses but rarely within firms. Duplicative processes, offering little or no competitive advantage exist across the industry, boosting its cost base for no benefit for clients. Technology, as evidenced by some of the front-to-back solutions, is being used to make the clients captive as well as offering some value by eliminating multiple record keeping and reconciliation. Legacy remains embedded in the process as a barrier to logical development and is the driver for many applications that can only live close to the legacy platform rather than be delivered by it. The cost of changing legacy makes individual development impossible; the solution must be in shared platforms in the cloud, through utilities. or their future embodiments; and these should also allow many of the firm specific, function limited applications to be eliminated and absorbed into the core. Standards will also be fast-tracked and the world of securities numbering must be rationalised and revolutionised in this new age. Firm specific delivery of data will go the way of voice with utilities providing firms with the best infrastructure for their needs. The financial value of these developments will be embedded in the move off fixed cost bases that are difficult to develop to variable cost ones where the cost of change can be spread over multiple users. And the new world will allow us to create an environment where multiple disciplines across financial firms, such as transaction banking, trading, origination and other specialisations, use standard technology and common source data held in genuine lakes.

Client delivery will change. The reality is that core processing needs to be one hundred percent accurate and delivered in ever tighter timeframes. Over and above the imperative for digital communication across the value chain, be it in market infrastructure, client or counterparty experience, there is a need for fast solution, and anticipation, for exception processing so it becomes a part of the core process rather than ancillary to it. The product reach of the future will be multi market and multi instrument but also linked to efficient cash and collateral management with instant payment and amalgamation of accounts across multiple suppliers. Pricing will become more complex with tighter controls over bespoke trades, accounting for size beyond the market norm and stricter rules around liquidity. Regulation will continue to be invasive with the likelihood of an East-West divide with the EU and US going the route of the lawyers and compliance kings while Asia, and perhaps the UK, adopt a more principle-based process with greater flexibility allowed on detail.

Regulation will also continue to be a trade barrier in closed markets as much as a driver for investor protection. All this points to a more complex client relationship with a need to move from multiple silo-based specialists to specialised and limited in number points of contact; ideally even down to one per client where the client faces that way to the firm. Interaction with the client needs to change and adapt for changes in working environments. Virtual communication will become more the norm although physical meetings will run alongside them. The deficiencies of many of the current communication tools, quality of connection, sound, security and vision, are likely to be overcome to allow more effective interaction.

Profitability will change although that is likely to be driven by the buy-side, where a pricing revolution is well past due. Can we imagine the sell-side being compensated by performance-based remuneration driven more by that of the manager rather than the supplier? Will forex and NII become the engines for value as they have been in the past; the fact is that transparency has killed off much of that golden goose. Costs will fall if firms really grasp the chance of shared structures. Costs will fall if efficiency improves for the main cost of back-office processing relates to exceptions. But costs will rise if added skills are needed and globalisation will eliminate much of the cost arbitrage still possible by offshoring or similar actions.

The reality is that markets and the business is getting ever more complex and the future is going to be bright for those with scale, imagination and courage. Are my thoughts of change right; perhaps not on specifics but I suspect that directionally and scope-wise they are. Is the current market brave enough to face up to this challenge or are we at a Kodak moment where the legacy players will be side-lined or, at best, marginalised, in an environment which demands fundamental change.