You may disagree with the number of years or the percent, but everyone understands that automation in the funding and collateral space is occurring at a fast pace. The question is how you prepare for this inevitable future? Our view is that connecting data from disparate sources is the key to the next evolution in the funding markets. A guest post from Transcend. Read more
As firms look for ways to increase efficiency and reduce risk across the business, collateral often remains gridlocked. Transcend’s Collateral Management & Optimization solutions help firms completely redefine how they manage collateral – leading to increased liquidity, lower costs and greater compliance.
In recognition of our innovative approach, FTF has shortlisted Transcend for ‘Best Collateral Management Solution’ in the FTF News Technology Innovation Awards 2019, which celebrate noteworthy progress and achievements in operational excellence over the past year.
You can help decide who wins by voting here – look for Transcend Street Solutions in category 7, ‘Best Collateral Management Solution’. Voting closes on April 12.
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IT innovation doesn’t just happen, even in the capital markets where opportunities for substantial improvements in areas like collateral and liquidity management can lead to greater, measurable and sustainable returns. All IT innovation needs commitment, investment and a strategy to make a difference. But most importantly, it needs unwavering leadership if it is to deliver the competitive success it promises.
And here lies the conundrum.
Bank executives already allocate hundreds of millions of dollars (even billions) annually towards technology budgets, yet they are still being bombarded by the claims of a myriad of new developments and solutions that promise an elusive holy grail.
How should the business digitize, become platform-based and leverage open architectures to drive data management strategies that deliver intelligent information? Finding the key to this will strengthen decision-making across all front-to-back office functions.
But it’s not surprising that there is resistance to change, with perennial questions to be answered such as: Why can’t we get more out of our existing IT estate? Will that spend even deliver half of what it promises? What disruption will there be to existing systems while this takes place and how long will it take?
These are understandable executive concerns, given the time consumed by regulatory compliance, the dynamics of a rapidly changing market, and constant pressures to reduce costs and improve margins. Also, not unnaturally, executives lean heavily on historically well-resourced internal IT teams to guide future decision-making, and hence investment.
But it still came as a shock to many when a 2015 Accenture Report estimated that 96% of bank board members had no professional technology experience, while only 3% of bank CEOs had any formal IT knowledge. At the same time, another study said that the top 10 banks have more IT personnel than the top 10 financial software vendors.
Some say that “ignorance is bliss”, but others counter, “If that’s the case why aren’t there more happy people about?” And this reveals the dilemma.
A lack of IT and business alignment in banking has been a thorny subject for years, constantly framing the two sides as adversaries, rather than partners. These differences often create a chasm of understanding of the priorities, objectives and vision of “success” for each side, effectively stagnating progress toward the necessary transformation.
But there is a way forward.
Take, for example, collateral management. We know processes are often gridlocked, liquidity constrained, technology inflexible and access to pertinent data denied by historic silos and working practices. Every week we see how this results in lower capital returns and impaired profitability, at a time of increased competition and shrinking margins.
What used to be a straightforward back-office task to ensure sufficient and appropriate collateral has become mission-critical in pre-trade decision-making as constraints on capital, regulatory pressures and efficiency mandates demand optimized collateral deployment firm-wide.
But recognizing the problem is only the first challenge. Attempting to fix system pitfalls with a few bandages on already stretched legacy systems tends to compound the problem over time.
Experience shows that wider collaboration is feasible – and is working. Banks are now better able to lean on the expertise of outside IT vendor expertise, whose claims are not only battle-proven but are ones that complement rather than threaten internal teams. Developing collaborative partnerships with the business, internal IT and select external vendors who bring new ideas, innovation and experience to the table can significantly advance the firm’s technology objectives. Furthermore, there is a greater willingness to consider cloud-based solutions, as cost benefits and improved resilience start to outweigh historic operational risk concerns.
This collaborative approach also benefits internal departments by enabling them to deploy talent where it can be most effective. It encourages the injection of fresh ideas into internal debates, complementing existing capabilities with a step-by-step series of tactical enhancements that eventually deliver a strategic objective – without undermining business opportunities or day-to-day operations.
If this leads to more effective data aggregation and analysis, there will be better-informed decisions that deliver tangible improvements to business profitability, while also reducing risk and bolstering regulatory compliance.
A fresh look at enterprise-wide technologies also lays the foundations for ongoing automation of critical business processes. By starting in a segment like collateral management that impacts all asset classes, business functions and jurisdictions, firms can enable each stakeholder across trading workflows to evolve and provide greater value to the broader enterprise.
This should not only produce a more effective and profitable business but a better informed and more confident executive team that is further empowered to deploy technology more widely to the best benefit of the business.
Once there, they can probably also have a laugh and raise a margarita to Jimmy Buffett, who one of my island-loving peers quotes: “Is it ignorance or apathy? Hey, I don’t know and I don’t care” – because by then everyone will know and they will care.
In this article in Securities Finance Monitor, Transcend’s CEO Bimal Kadikar discusses the opportunities for more effective liquidity and collateral management – and the potential benefits to the bottom line. A solid starting point is inventory management whereby firms can match collateral to needs, improve front-to-back office communications and increase operational efficiency and compliance.
Access the full report on Securities Finance Monitor.
To download this article, please click here.
Capital markets firms are faced with tough choices in their vendor and utility selection. But when should firms choose to partner with vendors, participate in industry utilities or insource development altogether? This article provides a framework for thinking through the options.
Capital markets have always been fast moving but seldom have the drivers of change come from so many directions at once. Both buy-side and sell-side firms are contending with simultaneous pressures to comply with new regulations, find new ways to generate revenues and to cut costs. What makes this environment even more challenging is the interaction between these competing goals. Implementing new functionality to comply with new regulations is not enough; systems and processes also need to adjust to accommodate changes to business models driven by those regulations. New business initiatives have historically gone through due diligence processes of varying degrees of strictness and now need to satisfy control questions from the outside. All this at a time when technology is evolving at a dizzying pace providing many options that were not viable until recently.
These challenges should not be perceived as all negative because the current environment presents many positive strategic opportunities. From established technology providers to the newest fintech start-ups, there is now an unprecedented choice of technology vendor options. There is a greater willingness than ever by firms to partner and develop industry solutions and to support, and in some cases create, new service providers. Meanwhile, at long last, the breadth of new functionality offered by these providers is matched by their depth of expertise. Solution providers frequently now offer not just “software” or a “service” but a complete solution package.
While capital markets players show increased willingness to turn to others for help in this challenging environment, there is also the recognition that the return on investment from internal technology resources needs to come from genuine differentiators in areas such as trading, data analytics, risk management and client interaction. In this world of both challenge and choice how can firms make the optimal choices without becoming stuck in analysis paralysis? At the most fundamental level they require a framework for deciding when to build, buy or network in collective enterprises.
For a capital markets firm, the starting point for creating a framework is a realistic assessment of who they are, where they are going and what they are capable of. Some firms’ strengths may come from getting the basics right in areas such as operations or credit. Others may be innovators, creating new products, being the first into new markets or the first mover in the application of new technologies. Few, if any, firms can be good at everything and the effort of trying can be counterproductive. A realistic recognition of strengths and weaknesses is key. This analysis needs to be conducted front to back ⎼ including business functions, personnel and technology capabilities ⎼ to ensure the most holistic understanding is developed for optimal decision making.
The next step is for a firm to understand where it wants to go, or more often in the current changing environment, where they need to go. Banks have been constrained by the pressure to build up and conserve capital. As a consequence, many formerly key business areas have shrunk or been closed. On the buy-side, active fund management, a traditionally high margin business, is under threat. Business changes such as the growth in popularity of low-cost ETFs and the rise of the robo-advisor are having major impacts on business strategy, even where the basics are sound. Whether a business strategy is expansive or reactive, or simply aimed at preserving a successful franchise, it has a major impact on a framework for interaction with technology and service providers.
Lastly, firms need to assess the potential of help from external parties versus the strengths of internal capabilities. One of the most significant recent developments has been the willingness to develop shared industry resources. The general driver for this has been a recognition that many parts of a financial sector organization (including the relevant parts of infrastructure) are non-differentiating sources of costs rather than sources of competitive advantage. Though industry utilities have been around almost as long as computers, they have tended to focus on a limited set of functional areas.
The new generation of utilities are appearing across front, middle and back office. Some notable examples include: FIS’s Derivatives Processing Utility which grew out Barclays; Accenture (in collaboration with Broadridge) Post-Trade Processing that absorbed business functions from Societe Generale; and more traditional projects such as Symphony, a collaboration of 16 major financial firms building a secure communication network. Another change of emphasis has been from the traditional regulatory drivers behind major utilities to more commercial drivers. In some cases, superior internal performance may actually create the opportunity for revenue generation by using that capability as the basis for an industry utility.
There has been a high degree of consolidation of financial software vendors in recent years. Firms such as FIS have grown through a long-running series of acquisitions (notably SunGard at the end of 2015), Broadridge Financial Solutions continues to make acquisitions, and UK based Misys recently merged with Canadian D+H to form Finastra. Consolidation has also been driven to some extent by internal procurement departments, which in many large financial services firms have worked to reduce the number of vendor relationships.
Despite these trends, there has been little reduction in choice as new fintech vendor firms grow. “Innovation” or “digital” teams across capital markets firms have worked to build bridges to the more promising start-ups. Choice in functionality has been matched by choice in the type of offerings. Capital markets software is often now available as part of a comprehensive package including cloud-based hosting, integration and maintenance. Newer fintech firms may not be as big as other vendors but they make up for it with speed of execution, nimbleness and innovation in driving complex challenges. They are able to adopt some of the latest technology innovations much more efficiently than their larger counterparts.
Add to that the management of staff to execute the business process, and one end of the software services spectrum is indistinguishable from a utility. Still, partnering with a vendor creates the bane of any project manager: more dependencies on outside parties can mean more risks, the potential for slow turnaround and reduced control. The alternative, however, isn’t foolproof. Good internal development teams and working in genuine partnership with a business can deliver changes rapidly that are focused on a business user’s needs. However, writing new software or even carrying out the full integration of a vendor package can be a high risk and high-cost strategy.
A good amount of the current enthusiasm for partnering with new fintech firms or joining industry utilities come from few key factors:
This can make it harder than ever to deliver a project to budget, with acceptable timescales and user expectations. Even where a firm shows expertise in one area of technology, it is unlikely to have breadth and depth of resources within its IT function to do everything to the same standard.
Depending on an honest assessment of the firm, its capabilities and business strategy, different choices may be made about buying, building or collaborating. If a capital markets firm’s need is for relatively standard, commoditized functionality, then the key factor becomes the gap between their offering and the firm’s needs. The wider the gap, the greater dependency on additional work being done and the greater the implementation risk. If a wide gap exists between the firm’s needs and the full range of offerings, it may be worth going back to basics and asking why its needs are so different to peers that make use of software packages or other services in the first place.
If one or more potential partners can provide the desired functionality, the characteristics of the vendors themselves need to be considered. Important variables will include vendor capabilities and skill sets in terms of business domain and technical innovation, reputation in the industry, and extensibility of architecture and offering. Many large vendors provide full feature functionality but it may be hard to customize whereas some newer fintech firms are leveraging more flexible technologies to make their offering able to meet various needs. If a supplier can provide functionality that can then be extended by an internal team, it may be an advantage as firms don’t always need to rely on the vendor for critical business changes.
If businesses require more innovative solutions than they are capable of mustering internally, it is likely that a partner will be of benefit. But the characteristics of the partner may become the most critical factor. Any partner chosen needs to have a genuine understanding of the firm’s needs. Genuine understanding comes from the combination of both technical skills and real-world experience. Suitable partners also need to understand the value of building a solution that is not just for today but has the flexibility to adapt to tomorrow’s challenges. Regulatory changes, such as the requirement to report securities finance trades under SFTR and margining of FX Forwards as a result of MiFID II, can have dramatic impacts. On the positive side, market changes or the rapid uptake of a new product can still lead to dramatic increases in volumes. In this case, firms need to look for a partner and not just a vendor because they may be able to help them assess their current capabilities and also help define the roadmap based on their understanding of the industry and regulatory landscape.
Utilities will continue to provide their own unique solutions, but the vantage point of a buyer or user should be: “is this process sufficiently commoditized that a utility can meet my needs?” Any truly commoditized process can be outsourced to a utility, while processes that offer or require differentiation should be managed internally by the firm. Firms may also need to have internal capabilities developed in-house or through a vendor to connect to the utility and take full advantage of their services. Utilities have a lot to offer, but firms need to be proactive in making the decision about what is a competitive advantage and what is a commodity service.
Creating a framework for understanding a capital markets firm’s capabilities and comparing the results to the vendor and utility landscape is the first step in deciding whether to build, buy or partner for solutions in today’s market. The catchphrase of outsourcing is easy; the hard part is ensuring that firms are building flexible partnerships for the long term. At Transcend Street, we find having a great product or solution is a good start but not enough to win the long term partnerships. Our clients reach out to us because of our team’s broad industry experience, thought leadership and our focus on execution and delivery. Our vision, its alignment for the client’s benefit, and our capacity to be a long term partner in their success is our crucial differentiating factor.
As technology becomes increasingly complex, it is imperative that firms conduct a holistic review of their own capabilities and strategically identify the right partners. Too often, firms focus on features and functionality comparisons across solution providers but not enough on critical internal assessments. In the brave new world, where profits are scarce, cost pressures are high and regulatory compliance is crucial, firms that can master this strategic balance of internal builds and strategic partnerships in the industry will have a significant competitive advantage.
This article was originally published on Securities Finance Monitor.
NEW YORK, NY November 05, 2015
Transcend Street Solutions announced today that Jon Beyman has joined the firm’s Board of Advisors. Jon will help the team in business and product development strategies along with building industry alliances for the recently launched CoSMOS product.
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