In the opinion of Jonathan Firester, managing director of capital markets at Accenture, if you look broadly at the financial landscape we are in the latter years of a series of transformations that started after the '08 crisis.
"If you think of all forces that occurred and we've been responding to, there were regulatory forces, changes in customer behavior, and changes in their financials which cause them to look into various portions of an expense base to cut costs and to improve profitability and ROE… If we look at the top 10 challenges they face now, you're looking at the later changes of that transformation."
It is easy to get lost in every day work, clients worry about this too, he adds. "We want to help clients think about and prioritize issues, to focus and aggregate all the honking of all experts who are all having different experiences across industries and functions in technology."
A complete list of the top 10 challenges facing investment banks can be found here, those most relevant to technology in financial markets are detailed here.
1) Restructuring the Investment Bank: Streamlining and Rationalizing
It is no longer an arms race to create more innovative and complex derivatives, instead banks are pulling back to streamline flow of products, and looking to their technology platforms for answers. Focus is on removing the expense and complexity of long entrenched technology platforms, and in many places replacing complex custom platforms with combinations of off-the-shelf packages with fewer and more focused pieces of customization.
The potential expense savings here are pretty extraordinary, says Firester. "I think it's the most important technology discussion, but also the most difficult." They are big and lengthy, results aren't immediate, but can mean the difference between successful or unsuccessful products ROEs.
2) Watching Closely: Improving Surveillance and Mitigating Conduct Risk
Regulators have become very thorough in terms of monitoring, measuring and mitigating all different kinds of risk, and the public eye still looks towards investment banks with skepticism. Therefore a huge amount of attention internally and externally has been placed on the technology tools clients are using to look for and predict risk events.
Using more data across products and functions than in the past enables risk measurement and risk management tools to produce more information about levels of potential risk begin taken, explains Firester. "Every risk manager is looking to move from measuring to predicting risk, so there is a lot of technology related to that measuring and monitoring. Even just aggregating risk management across products is a complex undertaking from a product overview."
Management has made it clear that surveillance and risk management are responsibility of the business themselves. It's no longer a tension between line managers pushing for profits and compliance department pushing back against them to make sure nothing risky was happening, They now accept risk management is important across the line, they can't have a strategy that involves taking inappropriate risk.
3) Rethinking The Digital Proposition: Providing Information Clients Really Need
Technology has created disruptions in other industries, but none like the investment banking sector. The very economics of exchanges have changed, leading to some interesting conversations with clients about which major disruptions they can prepare for.
"These are disruptive technologies that enable strategic differentiation," explains Firester. This includes taking advantage of multi channel relationships with clients, cross selling products and maximizing client interaction with their portal by providing more content to those who need it most.
4) A New Ecosystem: Using Utilities to Share the Load
Do not focus on commoditized parts of your business that provide no differentiation in the market. Instead, different software packages and a utility based model helps banks get to the next level without revamping IT systems or great expenditures on compliance.
In financial services there is a long history of customized products. There was a time when that flexibility was worth it and there were profit margins to support it, explains Firester. "Now you don't have to do everything in house, many components are similar across competitors." Settlement, creating regulation reports, tracking reference data, are examples of services that may be more effective as industry utilities. "It just doesn't makes sense for clients to invest internal resources on parts of a business that doesn't differentiate themselves from competitors… Clearning and settlement was something you had to do right, but rarely an area of competitive advantage. So it's a natural thing to outsource, especially where costs go down with scale."
5) Sustainable Funding: Managing Collateral & Liquidity
Firms are investing their development dollars on cross product systems, trying to lower historical cost of complexity and of custom systems. "Because this global cross product integrated management of collateral and liquidity is so important, in the sense that balance sheet and collateral has become the focus of a bank, optimizing it has become critically important from a risk management point of view," says Firester.
It requires linking together all systems that manage and transact collateral across different products, and it is a huge tech investment, requires integrating systems of data across products and regions. "Integrating all sources and uses of collateral, understanding where is it coming from and where to post collateral, that's an important set of technology investments."