Sibos 2016 appears to have marked, in the eyes of many, the final triumph of technology over business in the operations and transaction services space. That reflects, undoubtedly, a perception of a sea change in IT architectures and perhaps even in the global transaction banking business model, which has now become more data or information rather than pure transaction driven. But it also overshadows the ongoing need for an ever more powerful client service proposition and sound business and risk management. Technology can be an aide to both but it will never be a total substitute.
And we need to consider the economics of the industry. Much as we would like to return to the era of the high banking sector margins I knew when prime lending was at 1-1.5% margin, brokerage at 60-100 basis points or custody fees around 15-25 basis points with clean payments being made for US$5-10 a shot, we are not going back there. So without taking account of the financial cost of enhanced client service and risk management, we need the revenues to cover the growing technological revolution. Unless, of course, one really believes the current incumbents are to be swept away by a wave of new entrants from the Fintech and related worlds.
In these two opening paragraphs I have made several assumptions. I have assumed there will be a sea change in technology and business architectures in our sector. I have asserted that people will be needed as well as machines. I have assumed revenues will be needed for investment. And I have questioned if new entrants will sweep away incumbents.
Why do I see that sea change in technology and how will the securities’ business model change? First, I expect we will move to a distributed ledger across closed user groups. The logic is undeniable and the mechanisms are there although they need refining. Second, I expect markets will digitalise to a far greater extent with data being enriched throughout its transaction life cycle rather than being replicated across multiple almost identical data sets. Third, I see the markets moving predominantly to real time settlement and the twenty four hour day being adopted especially for major globally held instruments. And finally, in the securities field, I see the elimination, at least for spot transactions, of any role for CCPs, an enhanced role for trade matching and allocation providers and a continued notary role for CSDs. At the same time, I see the further emasculation of traditional Exchanges with their role covering lower liquidity counters whilst the liquid ones are traded electronically over MTFs. This implies greater linkages, enhanced information and universal standards. And I see regulators enforcing the latter especially as they demand that same information in machine readable form for their own needs. In this environment the custodians may get even closer to their clients trade by trade as the managers of settlement and liquidity as well as the recipients of data to enable them to undertake their oversight and other support roles. These support roles could be multiple and may include settlement fail management, stock finance, collateral management, regulatory and other reporting as well as data mining of proprietary and market information banks. That will mean a major re- engineering of the market process and I suspect the attrition rate among buyers and suppliers will equal that of the 1990’s when we emerged from paper and first embraced automation.
Why though cannot this all be automated and why will people be needed? First, markets are dynamic and not static, thus there is a need for expertise to define and initiate changes required. Second, it is inevitable that there will be breaks in process, and, even if they become fewer, they are likely to become more complex. Then, we have to recognise that information needs to be understood and, especially as markets become more transparent, clients and intermediaries will need to have the ability to understand and assess the reactions to the volumes of information they provide by other parties. And automation creates its own issues from dependency on the technology that cannot be totally failsafe through to the ever worrying and increasing threat of cyber-crime or the ever faster need for technology renewal. All these factors are relationship or expert knowledge issues. Fewer people may be employed in operations and client service in the future. But more will be needed at the senior end and the cost of this increased skill base may well increase the overall cost of business.
I mentioned the need for a changed business model and a changed IT architecture. That will be expensive despite the likely continued reduction in the cost of technology. How will business move from today’s structures to the new ones. I doubt it can be other than incremental. And I suspect that it can only occur with a major shift away from proprietary to shared platforms. I see a lesser role long term for entities such as CSDs in a real time settlement world although they must be well positioned to be the trusted party in any future distributed ledger management operation; hence my earlier assertion of their notary role. But I also suspect that they could be the facilitators for shared technologies. I would foresee alliances between major providers, Fintech and business, beyond the securities sphere, to create common utilities in a range of services. Quite simply the pace of technology change, the cost of technology development and the need for rapid amortisation and substitution will drive any self-providers out of business. I suspect the same trend will occur elsewhere in the transaction banking space with organisations like SWIFT also having a great opportunity to extend the scope of their facilities provision.
But why should current incumbents survive? Quite simply, the business is going to see margins fall and consolidation occurring. Consolidators will need to see themselves, not as masters of the universe, but primarily as value added providers in the relationship, development and risk management space across the transaction banking life cycles. They will need to collaborate with Fintech and provide the capital or liquidity support for the values owned or transacted by their clients. And as long as they have the skill to move from straight through processing across linked and duplicative platforms to full digitalisation and true automation of the industry life cycles, they will survive. The metamorphosis I am forecasting will take much more than a decade. But, irrespective of the geeky excesses and hyperbole that was so rampant at Sibos, key is that the building blocks for that change are now already being laid.