Certain industries and their corporate cultures have ways of turning unproven business strategies into gospel. The senior leadership team will buy into a strategy and defend it to all naysayers. You can't really blame a CEO who stands behind the strategy he created. It's hard to admit your wrong, especially is shareholders are breathing down your neck.It often takes a third party to come in to break the news to a company that there are better ways to run the business. Yesterday, I had a meeting with Suzanne Duncan, industry leader, financial markets, for the Institute for Business Value (IBV), IBM's independent research and consulting arm. The IBV is essentially a research-based think tank that is looking at all sorts of business ideas, trends, regulation and financial strategies that impact businesses across a variety of industries.
During the meeting that covered a wide range of topics, Duncan discussed a number of disparities between what financial companies do and what is actually happening in the financial markets. For instance, when it comes to high frequency trading, the number of market participants who think HFT provides value is shrinking. A year ago, a large majority of institutional investors (sophisticated, experienced financial experts) thought that HFT provided a valuable service to the markets (liquidity and efficiency). Today, however, (and this data was collected before the May 6th Flash Crash), the number of institutional investors who question the value of HFT is quite higher, with many no longer sure if it is a good thing to have 70 percent of the markets traded by machines, she says.
Likewise, the trust gap between banks and their clients has never been wider, according to Duncan. When surveyed, more than 70 percent of banking executives said that their clients trust them. However, the exact opposite was true when banking clients were asked if they trust their bank. Likewise, bankers feel that customers are looking for new banking products and one stop shopping (universal banking), while clients have those two items at the bottom of their priority list. Clients really want ease of use and good unbiased financial advise, Duncan points out, based on the IBV's research.
However, Duncan says the number one disruptor financial services will face over the next few years will be regulatory reform. "The banking crises are becoming more frequent, more disruptive and more painful," Duncan says. " Banks and regulators certainly are aware of this. When we talk to regulators around the globe they are trying to balance the stability of the markets with innovation, but they feel that politics is playing too much of a role right now."
Increased transparency, requirements to hold larger capital reserves and regulations that will discourage short-term risk taking and encourage longer-term stability and profit will be the biggest disrupters in financial services, Duncan added.Certain industries and their corporate cultures have ways of turning unproven business strategies into gospel. The senior leadership team will buy into a strategy and defend it to all naysayers. You can't really blame a CEO who stands behind the strategy he created. It's hard to admit your wrong, especially is shareholders are breathing down your neck. Greg MacSweeney is editorial director of InformationWeek Financial Services, whose brands include Wall Street & Technology, Bank Systems & Technology, Advanced Trading, and Insurance & Technology. View Full Bio