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Capital markets – time to take a simpler approach?

Paul Garbutt Paul Garbutt

The capital markets sector is at an inflection point. Following 10 years of historically low interest rates and poor returns, firms are facing increased pressure to perform.

Most organisations have embraced new technologies to keep pace with competitors and generate value. But are they just creating a web of complex tech that eats up capital and offers little in return? Is it time for firms to rethink their operating model and focus on the elements that genuinely differentiate their offering?

Technology doesn’t have to be complex

The pace of innovation is accelerating and tools, such as distributed ledger technology (DLT), artificial intelligence (AI) and cloud services, can help firms keep up with client expectations. But new technologies are all too often layered on top of legacy infrastructure – creating operating models that are increasingly fragmented and overly complex. Architectures like this will never be able to perform to their full potential and may even contribute to inefficiencies.

To combat this, firms can draw on new technology to reinvent the organisation by outsourcing or using mutualised services and retaining a simple set of core activities that are commercially sensitive and genuinely differentiate their offering. This will mean applying ‘as-a-service’ models as the default and developing in-house solutions only where strictly necessary, reducing overall spend.

The future capital markets landscape will also use distributed ledgers to act as an immutable ‘golden source of data’ across market participants, reducing the need for many operational and administrative processes. While still considered an emerging technology, DLT is evolving rapidly, with live solutions such as Cobalt DL.

It’s becoming clear that over the next five to ten years DLT will be adopted as a standard element of business operations, helping to unlock synergies and supporting mutualisation of key operational functions. For example, a single distributed ledger can be used to record trades outside of the organisation, reducing the need for existing processes around matching, confirmations, reconciliations and regulatory reporting. This is critical to reducing the cost per trade to sustainable levels.

Taking a mutual approach

While a mutual approach may be a big change for businesses, it will offer significant long-term benefits in the form of:

Increased agility

Organisations are typically locked in a cycle of upgrades on legacy systems, to remain current or to meet new regulatory expectations - leaving few resources for innovation. Firms with legacy platforms will be left behind, while more agile competitors can develop new services and gain a greater market share.

Greater simplicity

The simpler the architecture and the less components it has, the more agile a firm can be. Not only will this reduce overall cost, but it will also allow for innovations to be developed and deployed at a faster rate. From a regulatory standpoint, greater simplicity is always a good thing. For example, under the Senior Managers and Certification Regime, senior managers must understand how their systems work to satisfy their obligations and reporting requirements.

Availability of data

A consistent enterprise-wide view of data will allow access to more data for reporting, making it available to machine learning and other advanced analytics such as artificial intelligence. Effective use of data is a key differentiator for businesses and, as pricing and operating models standardise, customer insight is arguably going to offer a greater competitive edge than pricing or process effectiveness.

Moving away from legacy systems

Most firms rely on fragmented architecture that has been built up over the years. This includes legacy platforms stemming from incomplete change programmes or mergers, to the inevitable Excel spreadsheet that still manages key business processes. IT resources are scarce and, in reality, there are many improvements that just don’t make it to the top of the priority list. But simplifying processes can involve decommissioning redundant infrastructure, making the remainder easier to manage. It can also help to focus resources more effectively and move away from simply keeping the lights on to a place of genuine innovation.

What to do now?

Across the capital markets sector, innovation is progressing at a rapid pace and you should consider what this means for your business. By reviewing your existing architecture you can develop strategies around these new technologies, including identifying which processes need to be moved to an ‘as-a-service’ model and distributed ledgers. Once the technology has been simplified, you can decommission redundant architecture and focus on the core of the business, supporting future innovation and growth.

For further information on applying these technologies, please contact Paul Garbutt.