The UK has a long tradition of horse racing, and the major race events are critical dates on the British sporting and society calendar. Growing up, my family closely followed the National Hunt season, where courses range from two to 4.5 miles and incorporate fence-jumping. Interest usually peaked each year with the Cheltenham Festival, and its most famous race, the Gold Cup.
For me, the most memorable of these was the race in 1990. A two-horse race was expected, between the highly experienced Desert Orchid and Bonanza Boy. Although 12 to 15 horses entered the starting gate, the punters showed in pre-race betting that the choice was binary. I wasn’t convinced by this herd mentality, and so sought an alternative and, in my mind, better option. (The last paragraph explains why.)
It seems to me that this false sense of a binary choice exists in today’s post-trade operations, particularly when it comes to investment.
Choice One: Status Quo
The first and often default choice is that of the status quo. We reason, “Surely we can manage with the legacy solution just one more year. It pretty much does what’s necessary – and yes, we have more staff than we need, but they sit in lower-cost locations.” Plus, the barriers to change are stacked high:
- Post-trade has always struggled to access investment funds, especially for multi-year programs. There are always competing requests for limited funds, some of which are revenue-led and others that are compliance necessities that more easily meet the ROI criteria and feel more tangible.
- Introducing a new system often takes too long. The oft-asked question is, “Can we truly wait three years?” And as we know, most operations managers are paid for results within a much shorter timeline.
- The risks of transition are perceived as threatening to client stability and servicing.
- Perhaps most importantly, there’s the question of resources and skilled staff, and whether they’re sufficient to focus on such change.
So another year goes by, and we kick the tires and convince ourselves we can paper over the legacy systems cracks. And so for many investment banking institutions, replacing legacy systems becomes a non-starter.
Through no fault of their own, many financial institutions (FIs) fall into this trap. Their teams continue to process trades, trying to do more with less, accepting workarounds, relying on cumbersome tools no longer fit for purpose, endlessly reconciling trade flows, amending data, adjusting reports, and keeping track of payables and receivables in spreadsheets. In fact, some operations don’t appear all that different from where they were 20 years ago.
But the status quo is an understandable choice. During benign times, such a setup will likely survive (although it’s unlikely to prosper) and manage to duck enough material operational losses or regulatory breaches to live to fight another day. Most likely the real fault lines, gaps and Achilles’ heel of operations will only be exposed when the next crisis hits, as surely it will.
Choice Two: Blue-Sky Solutions
The second choice is one that offers a bold future and abounding blue skies. It’s one where we convince ourselves that the future is rapidly coming down the tracks and will be completely transformational. It’s a get-out-of-jail-free card, a solution that will help lift the operations manager out of his or her predicament. It’s an exciting world of blockchain, utilities, bitcoin, robotics, the cloud and Zero Ops. So now the heads of operations and IT have an option of, “Let’s wait and see. Let’s get involved in some prototypes, join some committees, create a vision of what operations might look like down the road.”
Of course, any sensible and forward-looking ops head should do this. If nothing else, it creates a sense of actively doing something. Meanwhile, and in reality, this creates a further barrier to near-term investment and change. “Why invest now when the future will be so different?”
So, on the surface, many operations managers juggle between these two choices. In reality, this is a “take it or leave it” Hobson’s choice – in other words, not a meaningful choice at all. Neither option helps the bank’s operations move forward now, next month or next year. Rather, it’s a choice between sitting on one’s hands because the barriers are too high and sitting on one’s hands because we believe a brave new world of new technology and process refinement will resolve all post-trade ills a few years hence.
A Third Way
What’s clear is that banks need a third choice, and this most likely involves externalizing. Rather than seeking change internally, there now exists a plethora of modern, sophisticated niche platform solutions that can meet FIs’ needs. Because these tend to be highly agile, they can be implemented quickly, with minimal risk, and with outcomes realized within a calendar year or sooner.
In particular, it’s time for banks to bet on the horse of managed services across a range of areas that offer them limited competitive differentiation. Hence, not only can banks now access smart, ready-made solutions from platform providers, but these providers also increasingly partner closely with service companies, and together they can jointly deliver on all of an FI’s needs, including operations processing, change management, consulting and technology solutions. This is true of large parts of post-trade. They need to take a long look at some of the smartest fintech and service providers in the market and hitch their wagon to the brightest of these stars.
The smartest, most innovative fintech solutions are those that offer modular design, ready-to-use application programming interfaces, flexible deployment, adaptive architecture and best-in-class tech. A range of case studies suggest the best of these are now able to provide full managed services through partnerships with service providers. This allows the FI to purchase a fully integrated solution, with pre-agreed outcomes, and usually via a single contract, service level and price. In our experience, such integrated offerings provide improved outcomes in terms of cost, risk and service delivery.
Key Areas of Focus
One post-trade area that is crying out for improvement is the simplification of complex reconciliations. Multiple and inconsistent data sources result in costly breaks and regulatory compliance issues. Irregularities create significant data migration challenges. Such areas experience resource-heavy recs, often with resulting backlogs.
Incumbent reconciliation solutions often take up to three months to introduce new or amended reconciliation controls. This is untenable in today’s dynamic, digital age, as new and more innovative fintech tools enable these functionalities to be deployed in under seven days. Switching to such platforms is becoming increasingly quick and simple for banks to integrate.
Fees and billing are other areas in desperate need of advanced automation. In functions such as OTC brokerage, backlogs and errors are common, in addition to missed revenue opportunities, P&L adjustments, write-offs, and poor client and regulatory reporting. Banks should seek modern solutions that can quickly automate and integrate workflows, enable timely payments, and leverage robotic process automation and cognitive automation tools (See our blog series on banking automation).
The winning combination will consist of banks enlisting smart and flexible managed service partners – those that not only provide agile, innovative platform solutions, but can also deliver the scale, reach and domain depth across associated IT services, digital, technology, consulting and operations services. (During Sibos, I’ll be sharing details on where I’ve seen this successfully implemented.)
Back in Cheltenham
So, why the trip down memory lane to Cheltenham in 1990? Well, that race taught me that forced binary choices are rarely optimal. I backed Norton’s Coin, an obscure and rather plain gelding stabled in a dairy farm in Wales. As you might have guessed, he won at the incredible odds of 100 to 1, and in the fastest time in 40 years. Sometimes, I guess you have to consider the alternative path. As the Aussies might say “give it a burl.”
Join us at Sibos, September 23-26 in London. You can visit us at Stand S124, and attend James Burrows’ session “Post-Trade. Optimized. Simplified.” on September 25 10:45-11:45 am, Open Theatre. We look forward to seeing you there!
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