Not so long ago, the equity and fixed-income sides of businesses demanded separate trade processing and reporting platforms built for their unique needs. They got them, too -- big, complex systems that cost big dollars to operate and maintain. Unsurprisingly, those days are largely over. Banks in cost-cutting mode have forced departments to restructure and consolidate middle- and back-office systems where possible.
But when it comes to sharing resource among industry peers for the purposes of efficiency and savings, financial services has notably lagged behind other sectors. Though nondifferentiating processes without competitive advantage are increasingly managed by third parties, the information and processes are still running independently of one another without uniform standards. This must change, according to Rampi Kandadai, senior vice president in the financial markets solutions group at Genpact, a business process outsourcing and information technology company. He wants to see operational efficiencies managed industrywide.
In some ways, the financial industry has become better at collaboration. For example, legal entity identifiers (LEIs) are replacing proprietary codes of business entities in the global financial market with standardized ones. LEIs are maintained, assigned, and controlled by designated third-party operators to help regulators determine risk levels and bring industrywide standards and efficiency to reporting.
Another notable area where financial services has taken steps toward collaboration, in the face of cost cuts and demanding regulations, is in shared know your customer (KYC) services.
Today, the biggest issues around KYC are that customers and large funds must provide data multiple times to a number of counterparts. Each transaction is a cumbersome process involving articles of incorporation, ownership structures, legal hierarchy, credit positions, etc. It's a time-consuming, manual, judgement-laden process. People can make mistakes, suggesting a lot of quality issues. Banks are not looking at KYC as a huge differentiator, and it's become a significant cost burden to maintain in-house systems to the satisfaction of regulators.
"That's really their biggest problem -- that it's expensive," Kandadai told us. "There's no uniform standard, so they don't know if they're doing as well as everybody else, spending too much money, not doing enough, and still regulators can come back and jump on them in every which way." He estimates that increased regulatory pressure has increased KYC costs from $500 per customer to roughly four times that amount in as many years.
Rather than suffering, he said, the industry has moved toward using a centralized, shared system to which funds can provide data once a year, and the service can distribute the data to banks as needed, as many times as necessary. "Banks still need to mange risk and take responsibility for decision making around that, but the grunt work around getting data from counterparts and clients and massaging it into usable data, you don't need to do that yourself." The KYC piece has hit a certain degree of maturity in terms of opportunity, and "customers have been wonderfully focused on it."
What's next: Reporting efficiencies
But Kandadai hopes this is only the beginning, because other areas are ripe for industry consolidation, especially around regulatory reporting.
"Other cost burden areas still on the horizon, but the sharing of reporting burdens is going to become more real in next 2-3 years," he said. "We think that there's an enormous amount of activity by banks required to produce reports that cross product and geographic boundaries and leverage front- to middle- to back-office communication. It is happening right now, and the cost of doing it incorrectly is going to be high in terms of fines and consent issues from regulators."
Banks are spending a lot of money putting together data repositories that will allow them to provide this kind of regulatory reporting. But like KYC, perhaps this is something that banks don't need to do themselves.
"There is a significant amount of manual work to pool data together, and customers don't necessarily have the best resources to do it," Kandadai said. "This is something that they are yet to get to the notion that someone can come in and do this for them or can do it in a central place and share infrastructure and technology costs across multiple banks. This is an area banks are going to want to look at as another opportunity to get these things."
As an added bonus, if firms are using industry standard services and industry standard methods for their reporting, it's hard for regulators to come back and say they didn't do this right, especially when multiple banks are doing the same thing. "It sort of creates a de facto standard, which I think banks are asking for in this space."Becca Lipman is Senior Editor for Wall Street & Technology. She writes in-depth news articles with a focus on big data and compliance in the capital markets. She regularly meets with information technology leaders and innovators and writes about cloud computing, datacenters, ... View Full Bio