Rewiring operating models in a digital asset world

What are digital assets teaching us and why aren’t we talking more about it? Asks Mike Tropeano, senior director at Broadridge.

Despite the crypto winter causing significant loss in market cap for cryptocurrencies and high level of volatility, digital assets are here to stay, causing firms to rethink target operating models. Digital assets are gaining momentum as financial service firms focus on the utility versus the potential for returns. The work to solve these new challenges will still exist when the volatility lessens. Many organisations find themselves under constant transformation, each time working from the ground up versus creating a long-term foundation. We, as an industry, need to consistently solve and prepare for: 

  • Creation of efficient processes for operational predictability
  • Ensuring interoperability in evolving ecosystems
  • Mitigating operating, reputational, regulatory, and financial risk

Supporting digital assets will require scale. More securities, lower price points for some and a higher number of transactions create new challenges. Transforming to support digital assets should be seen as an opportunity to prepare for the next disruption. It is important to start by understanding some of the natural ties between digital assets, factional share ownership and direct indexing, as you prepare for the ‘next big thing’ while creating a nimbler end state. Much easier said than done.

What can we learn from the early days of digital assets? How can it help with the next disruption? Where can we innovate today to prepare for tomorrow?

Setting the path forward 

Servicing digital assets requires scale. Friction costs money through lost revenue, increased cost, possible operating losses, and damaged reputations. ‘Traditional’ firms that capitalised early with crypto, did so because their business models were nimble and quickly transformed to meet market requirements. They approached these challenges with the mind of a startup.

Every system becomes a legacy application. Not all will require a re-write or replacement. Many take the route of modernisation. At the start of many disruptions, some organisations struggled because their vendor failed to recognise the new dynamic. When we work with a client on partner selection, significant weight is put on their strategy and ability to execute. Understanding their track record of meeting their past goals is the true test. How quickly did they transform? Are they adopting emerging technology or a new mindset? Is the business growing or representing significant revenue to warrant the continued investment?

You do not need to be a startup to be successful or replace your entire ecosystem, but you do have to act. Being stagnant is dangerous. After reviewing your partner strategy, we suggest executing these steps to address the current disruption and prepare for the next one.

Change your approach when designing target operating models – Aligning with innovative partners solves half of your problem. Partners provide the tools to transform, you need to execute. Modify your thinking from ‘we have always done it this way; it cannot be done’ to ‘how can we make it happen’. Equate new processes to what we already know to start defining your new target operating model. This future will come with different risks. You need to quantify potential impacts to determine the best approach to mitigation. Finally, identify what can be done to minimise friction while meeting your requirements.

Advance your API strategy (microservices) – If you haven’t begun, start and if you have started, accelerate. Not familiar with API’s and microservices? Use this analogy, many of us used Lego’s as a child. The big Legos would be the API, smaller Legos are microservices. Smaller Legos can be combined to equal a big Lego with the smaller Legos providing flexibility. Address the pieces that have the most flexibility and can have multiple uses. A practical example, a microservice to validate cash balances before transacting, could be leveraged to ensure an inventory of tokens or coins before trading. An inventory of reusable components with a high degree of flexibility for future use can be mixed and matched to minimise what is needed when addressing the next disruption.

Create Journey Maps – We continue to add to existing processes without considering the impact to the client and user experiences. Our goal is to always limit client disruption. However, by adding a step to a process without thinking of the impact, we fail to use disruption as an opportunity to reinvent the process. We make our problem of not being able to deal with disruption the client’s. Journey mapping allows us to simplify the experience, making it easier to adopt and transform in the future. When completed, a journey map can identify opportunities to develop API’s and microservices to drive efficiency. Done correctly, it delivers the answer to an important question, ‘would I do business with me’? 

Priorities will drive how you execute on partner selection and address each recommendation. Each is critical and needs some level of attention.

Markets are moving quickly

Less than 15 years ago, the market infrastructure for digital assets did not exist. Today, we have hundreds of exchanges, trading thousands of coins producing millions of transactions. New products continue to hit the market because of low barriers to entry. Great for the democratisation of finance; however, potentially dangerous because of possible inefficiencies in the market and the potential of meeting a bad actor. Recent drops in valuations have exacerbated these issues.

Some argue that regulatory agencies are not moving fast enough. The regulators are dealing with some of the same challenges we are, understanding the disruption, what are the impacts on stability, and how it impacts trust in the markets. We are seeing movement in North America with regulators recognising the need to deliver clarity while protecting the interests of consumers. What we need to realise is that whenever we experience disruption, some level of regulatory uncertainty will exist.

Organisations need to estimate the business risk and subsequent cost, of being late or even worse standing still in a rapidly changing environment. While it may seem difficult, consideration must be given to the future business impact, in both time and money. Even more difficult to quantify is the potential loss of business to modern players and tomorrow’s startups. It is reasonable to think that those who do not change their approach will have a reduced role in the next generation of financial markets.

Markets are moving forward, and whatever your path, be Ready for Next.