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.
The cost of technology, both development and maintenance, has ranged around the 20% of the total cost mark for some years. However, the share of mandatory developments, from regulators and infrastructure, has become the overwhelming bulk of all development work. In other words, internal enhancements are budget starved at a point when major spend is becoming a pre-condition for survival. In that scenario, especially in the face of the more uncertain future fee flow, there will not be funds available for the needed developments.
Collective alliances would spread the financial development cost but, conversely, also create shared business risks for the alliance members in the event of any material IT development failure. If it were not a survival issue, one would be wary of going down this path; but as it is such an issue there may be little choice. Governance will be tough to agree across the alliances if they are to be effective as indeed will common budgets and roll out plans.
In the world of robotics and shared solutions, suppliers need to revisit their understanding of their core competences and value added. Balance sheet is a major value as this is a risk business. Data curation is the industry’s primary role. Efficient processing is the second, but by no means less important, one. Tied in with the balance sheet, but going beyond to the softer issue of reputational risk, administrators that are trusted names are also value added.
More utilities are needed to avoid manual, error prone and costly grunt work; regulatory suasion may be needed to that purpose. Utilities such as the KYC utility are valuable but should become a mandatory requirement, to include updating, of SWIFT membership. Whether it is OMGEO or others, a reliable global standing settlement instruction data base needs to be adopted rather than the best endeavours structures we have currently. A pricing utility, meeting regulatory standards across individual jurisdictions, is another need; complex pricing would still remain a differentiator although we need to be clear that complex arises where judgement is needed rather than specific computations. Local entity identifiers and securities numbering may be boring issues for many, but they are imperatives for straight through processing and in need of major attention and regulatory direction.
How does this all pan out in a development sense? What is the exact vision? The current securities services value chain is broken, risky and costly. The market needs to stop tinkering around the edges and hoping stretched budgets will allow them to drip feed silo based micro-solutions. Management needs to stop hoping this is a ten-year issue and the crunch is due after they retire. Who will break this vicious circle? Given that the savings industry will be a growth one for some time to come, simply based on demographics with a growing wealthier global pre-retirement population, its revenue value is an enticing multi-billion one. Banks are becoming technology companies. The reverse could also happen. New entrants have swept away long-standing market leaders in other industries. It could happen in our own. The one thing that is certain is that the status quo is no strategy.