Nick Scott, Global Head of Capital Markets at TCS Financial Solutions, considers the future of digitisation and what it will mean for the financial services industry
ISS: What are you referring to when you say digitisation?
TCS: A simple definition of digitisation is the transformation of information into discrete units of data. The financial services industry has been doing this for decades, but the most interesting shift in focus is being driven by the expansion of benefits we can derive from increasing levels of digital content.
Our historical focus was primarily driven by a need for automation, to keep costs and risks in check and to address the drive towards more real-time status reporting by removing manual lead-times. The focus on mobility, big data and robotics has driven far greater areas of value.
This is changing the business case for investing in digitisation, far beyond the realms of headcount efficiencies and real-time data; new services and sub-industries are being created as we cross thresholds in data availability. Every segment in the supply chain will see opportunities and threats as this data expansion occurs.
ISS: Are we seeing digitisation of custody and related investor services?
TCS: Yes – we are seeing active investment in this area. The simplest example has been the work by SWIFT on 20022 to add further dimensions on data flexibility, while retaining or increasing levels of automation. But interestingly many industry players have shied away from upgrading their platforms to optimise the benefits of these, a signal that the step in improvement might not create a clear business case for the mid-volume players who purely look at this from an automation perspective.
More interesting, perhaps, is the focus on compliance and regulatory reporting, where growing levels of oversight are driving a need for asset managers to increase disclosures. Custodians were a natural provider of this, already holding high levels of activity and entity data, but were required to expand their digital content to find solutions that increasingly automated regulatory submissions.
The growing use of robotics in decision-making is also interesting. At one end of the scale this is through a complex set of equations. At the other end it borders on artificial intelligence. The rise of algorithmic traders has been notable, changing the core costs of investment managers while also creating new markets for players seeking to benefit from market inefficiency.
ISS: What are the trends in that business area?
TCS: We mentioned regulation, and this goes far beyond the points made above. We have seen acute focus by government regulators on Financial Crime Compliance with the largest industry fines being levied in this domain. The industry has focused on increasing the digital data that helps automate controls in this area, while reducing the extreme levels of process duplication that existed.
This sector works heavily under an omnibus account model, which was necessary to balance the inefficiencies of multi-layered supply chain. The digitisation of Legal Entity Identifiers and KYC data will help enormously to streamline this and move towards a real-time settlement cycle.
The new Basel regulations have placed a huge emphasis on capital provisions, with complex capital assessment models. Custody used to be seen as a no-capital business, but new regulations including AIFMD and UCITS V have highlighted the potential liabilities embedded in the provision of safekeeping. Stronger data is required to assess risk capital and to drive solutions that provide efficiency, including an increased focus on disintermediating layers that hinder a clear risk model.
Decision-making is another key area of focus, one that custodian models have shied away from. The industry needs to drive more value into its proposition and this could include the ability to leverage the advances in trading algorithms to develop a stronger and more automated set of solutions in the custodian layers, especially when it comes to corporate actions and proxy voting. This requires additional data sets beyond the traditional custodian’s scope of focus, but the value enhancements are potentially very significant.
ISS: Are some geographies ahead? Do undeveloped countries have an advantage?
TCS: Yes. To a notable degree the larger economies and capital markets have greater volumes and hence the necessity of digitisation has been the greatest. Emerging markets have had the opportunity to implement best practice regulatory and IT models for many years. Maybe the IT services industry missed a trick here – often trying to introduce Tier 1 capital market models and systems into emerging markets while expecting similar returns that were frequently unaffordable by smaller economies.
But it is clear that the barriers to new business models are far lower in under-developed economies. It is with interest that we watch markets like China and Saudi continue to maintain a T+0 clearing model, despite international objections that this deviates from preferred international standards of T+2. The challenge with T+0 real-time is not the technical challenge of instant payments and credits – the payments industry is already addressing this. It is simply the challenge of squeezing a more real-time model into the current multi-layered model. We need to reduce the layers to move to T+0, and this presents the biggest hurdle for an industry that is not used to such structural redesign.
ISS: What is the next big trend? Mobile communication and technology?
TCS: This is a constant ongoing focus. We need to enable products and solutions around mobile devices – this clear trend will be accelerated by the shift towards mobile and contactless payments.
But the more radical changes in the custody and investment industry are likely to occur in the investment management arena. We are seeing a few confluences; equity trading prices are dropping rapidly, access to digitised company analytics is increasing and private banking and wealth management are being forced to innovate to survive. We think that the opportunities for the industry to leverage robotics to drive more personalised investment portfolios will gradually see a shift away from traditional collective investment schemes.
Putting it simply, we are already seeing traders and alternative fund managers leverage complex algorithms to drive stock selection and investment decisions. We are seeing private banking and wealth management begin to leverage similar themes and this will drive into personal investment products and solutions before long.
ISS: Can an industry based on manual processing and which still hasn’t achieved proper straight-through-processing really go mobile?
TCS: Without doubt. To a degree we are already partially mobile. The challenge is simply that the services available on mobile do not offer the breadth of functionality that we expect. Most providers in the investment supply chain offer a degree of mobile transaction and reporting, but these lack the sophistication demanded in a data-enriched environment.
The current capital markets model is, from one angle, horribly inefficient. We have developed a multi-layered model designed in an era when manual processes were normal and end-client expectations were low. A typical investor in a mutual fund/collective investment scheme frequently uses six or seven layers of institution to cover their investment including a distributor, a fund manager, brokers, global custodians, local custodians, central securities depositories and registrars.
ISS: Where do you see the institutional investor industry and its providers in 10 years?
TCS: We tend to overestimate what can be achieved in two years and underestimate what can be achieved in 10. We should not underestimate the pace of potential change that can occur in this technology-savvy environment despite the slow pace that has typified the capital markets and investment industry in the past 30 years.
We feel there are a few areas that will see huge innovation and change over the next decade. Firstly, there will be far greater competition in investment advisory and investment solutions industry with the rise of direct robotic advisers. There is significant opportunity to further automate many investment decisions around a more complex set of digital indicators and this will spawn a fund-like industry that is based on direct individual investment decisions. To a degree we see the traditional investment management moving back towards a longer-termed and skilled frontage and away from the short-term focus that has typified much of the industry in recent years.
Secondly, the capital market model will slim down, driven in part by a need for real-time trading and settlement, but also by simple cost issues that force a more streamlined model. To a degree we operate in a model with significant role duplication; technology and market interfaces will reduce these layers as access to missing capabilities becomes cost-justified.
Finally, we will demand more interoperability between our financial products. For example the institutional focus on leveraging collateral and assets to reduce loans and obligations will flow into the consumer markets. It seems like a significant opportunity for personal assets including pension, investments, and real estate to help offset the cost of loans and liabilities. To achieve this will require extended levels of interoperability – either through digital and financial wallets or other models that link assets to personal identifiers.
ISS: Until banks take this on, the STRUCTURES in place, will remain as STRICTURES. How will organisational and operational structures need to change to accommodate the move to digital?
TCS: We are already seeing a shift towards more integrated structures and operating models. For the past 20 years, product-driven platforms and operating models were considered critical to driving product differentiation, but with the emphasis on greater interoperability silo models are being reviewed and shifted into shared service utilities that leverage a common set of systems and data.
Traditional distinctions between products are being removed. For example, a bank might offer custodian services in many areas including its securities services unit, investment banking unit, brokerage unit, retail, private banking and wealth divisions, each of which traditionally had its own platform and operations models.
To a large degree, the focus on digital has been bottom up for far too long, driven by reducing data set duplication and trying to increase automation. The big leap forward will come from focusing on consumers, understanding the product experiences that they require and building models that can accommodate this. This requires a strong core data architecture, but the more radical needs will come from the need to access new data sets rather than the clean-up of existing pools of data.
We are seeing much more focus on driving innovation; to do this technology providers often need to take a multi-segment view of the industry, helping to examine opportunities for new solutions and drive inefficiency from the existing models.
ISS: Do you have a quick recipe for success?
TCS: Providers that generate the greatest success with digital will have a strong view of client needs from the consumer down to the underlying investment. In this developing environment, providers who want to become successful and to remain successful will need to be adept at mobile, cloud computing and big data. And more…