The pressure for change in the way the capital markets operate is building relentlessly and the only way in which investment banks and other key players can remain successful will be to completely transform current business models. 

The pressure for change in the way the capital markets operate is building relentlessly and the only way in which investment banks and other key players can remain successful will be to completely transform current business models. 

This will mean an overhaul of archaic technology infrastructures and outdated working practises and the transition to an agile enterprise architecture that is scalable and robust enough to meet today’s problems and tomorrow’s challenges.

Margins are under extreme pressure as costs continue to rise and revenues are restrained by more risk-averse investors. In addition, the pressures on capital allocation ratchet ever-higher as regulators demand weightier safety buffers to protect against the impact of potentially more extreme (if unlikely) negative market outcomes.

Although appearing to be robust, stable and effective in delivering millions of secure transactions at ever-increasing speeds between ever-wider geographies, the cracks in capital markets IT capabilities are not only starting to show but are widening. The significance of the recent dismal round of earnings reports from nearly all the major banks, with little optimism about immediate prospects, has not been lost on industry leaders.

It was no coincidence that as J.P. Morgan announced their results last month they declared that not only “We are a technology company,” but at a time when it is cutting costs in nearly every other area of operations it said it is increasing its 2016 IT spend to $9.4 billion.

Refocusing IT Budget Deployment

More importantly, J.P. Morgan is re-focussing where it spends that technology budget, with the amount directed towards innovative investment and technologies rising to 40% of the total from 30%. It knows that as an IT company (or even a bank) it needs to allocate funds to where they can have the biggest impact on efficiency and competitiveness.

The message is clear, IT is not just important; it is critical to the future wellbeing and effectiveness of any financial institution. But even more pertinent is where that IT spend is directed. It will not be good enough to just maintain the status quo, but rather identify how existing resources can be made more robust and responsive, while simultaneously building new capabilities to meet new challenges.

Whether it is the imminence of the Blockchain, the arrival of the Cloud or the embracement of analytics, it is clear that not only will more need to be done with less, but it will have to be done smarter, faster and more accurately.

At the heart of this transformation will be more sophisticated use of data that delivers more relevant information, more quickly, to vastly improve the quality of decisions by those who need to make them – or Intelligent Use of Intelligence. This will mean a complete restructuring of the vertical, often asset-class based, silo structures that currently dominate banks’ IT architectures, into horizontal capabilities that are able to leverage data and pricing across asset classes to deliver comprehensive views of risks and outcomes to decision-makers.

At the same time as banks improve their front office capabilities to gain what are often only marginal (and sometimes temporary) edges over competitors, they also have to overhaul cumbersome and costly back office functions. These are too often still heavily burdened by the errors and exceptions that are an unfortunate natural by-product of manual processes.

This costly drive towards greater straight-through processing (STP) and automation is also opening the door to long-resisted collaborations with competitors over sharing resources such as post-trade utilities. Current pilot projects are likely to be only the first steps in this direction.

But whichever route is chosen, it is clear that more collaboration and the use of shared resources will be essential if the industry is to put an end to the burden of cost duplication.

Early Adopters

That’s not to say there hasn’t been investment in new technology. The capital markets have always had a reputation for early adoption given the importance to competitiveness of speed, agility and the demand to process vast volumes of data in minimal timeframes. The evolution of algo and quant trading, the refinement of risk management techniques and commitments to low latency all bear testimony to industry innovation.

But Wall Street is not what it once was and the current blood-letting shows no signs of abating, as more banks published dismal results for 2015, with fixed-income trading in particular continuing to be hit hard. For example Morgan Stanley cut 25% of fixed income headcount, while similar stories accompanied results across the globe as Barclays, HSBC, Credit Suisse, Standard Chartered and others all seek to cut more costs as losses mounted.

RBS, once the world’s biggest bank by assets, is already a shadow of its former self having slashed risk-weighted assets by more than 75% to under £250 billion and shut down most of its global network to the point where some 90% of its business is now generated in the UK and Ireland. It is pretty much back to where it started in terms of size, footprint and business model when Fred Goodwin took over as CEO in 2001.

The Need for Technology Transformation

There are some who have seen the light, UBS CIO Oliver Bussmann for one. He wrote recently, “I am very positive, because I believe technology will play a fundamental role in changing the dynamics.  It will disrupt outdated practices, provide opportunities for new players and above all dramatically enrich the services offered to clients.  For a long time the industry has needed this shake-up and some institutions may fall behind, but UBS is taking a leading role in helping to transform the banking sector.”

He added, “It is critical to balance the speed needed to drive competitive advantage against the importance of protecting clients’ assets and complying with a much stricter regulatory landscape.” 

The regulatory landscape is also becoming tougher and any new developments must therefore be both integrated and scalable.  Consequently IT systems need to have the flexibility and agility to respond to new demands from financial authorities.

Another factor to consider is that all banks do not need to follow the same path. More importantly, the industry needs to avoid the costly trap it has already found itself in through the duplication of technology investment. Instead, more collaborative models need to evolve where resources are shared and IT capabilities are delivered from cloud-based structures on an as-needed basis.

Next Steps

Not every bank will represent, or develop, an ecosystem that reflects the entire market. Therefore there are likely to be only a few truly global and universal players, supported by more specialist (local or regional) banks, albeit who adhere to global standards.

The industry needs to look outside and consider how smartphones and the digitalisation of individual lives have changed customer expectations. Banking services need to be accessible everywhere, at any time and on any device. Only new technologies such as HTML5, Java, in-memory databases, real-time analytics engines, super elastic compute grids and cloud-enabled componentised software architecture can fulfil those new higher standards, while giving the bank opportunities to grow.

This can be achieved more easily with open architectures, designed to leverage commoditised hardware and supported by the Cloud for lower costs and greater flexibility. The added benefit of infinite scalability delivers the ability to respond with the resources when needed.  The added connectivity to any system or service means the requirement to hard programme hundreds of standard industry interfaces becomes obsolete.

Digitalisation is everywhere. How banks choose to adopt or embrace it will be up to them.  These are just some thoughts on where the industry needs to aspire to be and how it could enable the bank of tomorrow. Imagine no more hard coded interfaces that take months to deliver, or risk calculations and big data analysed in a fraction of a second. No duplication, agility to respond and the reduced costs and lower TCO that result. That’s not just the future of banking technology, it’s available now. It will be interesting to see how many financial institutions agree and respond to the challenges with significant change to their IT investment priorities and business cultures to make it happen.

This article was first published in edition 6 of Rocket, our magazine. Download available Rocket editions here, and save your up to date address in your profile to to indicate your interest in receiving a printed copy of the magazine. Copies are also available to purchase and subscribe to via the shop.

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