The securities services industry has come a long way in developing its understanding of emerging financial technology (or fintech) in the last two to three years. While it has become apparent that the institutional space is not as vulnerable to potential insurgents as the retail financial services space, the challenge facing securities services providers is to collaborate effectively, leverage the power of digital technology or risk being left behind.
However, would it make sense for securities services providers to compete with fintech firms head on? It would appear not. Assuming that securities services providers could compete with fintech firms in this area, technical agility is not necessarily what their clients want. To win business from incumbents, custodians need to provide what their client base is seeking from them in the highly regulated environment they operate in, which includes consistent and secure client service, a robust suite of products and solutions, risk warehousing and credit support facilities, a reliable global operational infrastructure, regulatory and compliance support, and expertise encompassing in-country market knowledge and global reach. Fintech firms have proven that they can quickly develop new tools and platforms that offer value to clients in terms of speed, simplicity, mobility, transparency, cost and customisation. Banks that have adopted similar DevOps techniques have reported a 25% efficiency improvement in developing application updates1. Fintechs’ agility and single-minded focus enable them to quickly develop niche solutions that improve particular components of the value chain.
Nevertheless, this does not mean that incumbent banks can relax. Today, the task of leveraging technology effectively is magnified by the scale of the challenges facing the industry and the opportunities presented by the transformative potential of digital innovation.
As observed by the World Economic Forum2: “Facing enormous pressure to reduce their cost base, incumbent financial institutions are embracing new technologies, as well as working with long‐time competitors and new entrants alike, to commoditise cost drivers that do not provide competitive differentiation.”
Clients and counterparties now expect custodians to:
- reduce fees, minimise breaks, and improve processing times;
- deliver enriched, timely transaction data and actionable, tailored insights;
- leverage existing assets quickly and transparently, and provide safe access to new ones;
- provide regulatory and compliance support and advice; and
- support their evolving business models through robust but flexible infrastructure.
The current explosion of digital technology innovation has the potential to meet these needs. But firms in the securities services sector must step up: first by informing and educating themselves about the role of fintech in their revised value proposition to clients, then by developing strategies and identifying partners that will help them deliver that proposition.
As such, forward-thinking custodians are working closely with selected fintech providers, pooling expertise and resources to generate and co-create new ways of adding value. Some initiatives, while widely discussed, will take considerable time, resources and effort to achieve sufficient robustness for implementation. The migration of existing processes from legacy infrastructures to distributed ledger technology (DLT) – more widely called blockchain – is one example of technology that offers exciting possibilities but right now remains more of a promise than a reality.
Having said that, there are many other innovations being implemented today that offer short-term improvements in process efficiency and data management to the benefit of clients. A combination of robotic process automation (RPA) and artificial intelligence (AI) is already making significant strides in tackling long-standing sources of frustration in securities services.
For example, in post-trade settlement, while the vast majority of transactions go straight through, a significant number still need costly and time-consuming manual fixes. Now, AI-based tools can serve as digital trouble-shooters, detecting the flaws that would require manual repairs or otherwise impact service quality, thereby enabling swift resolution.
These short-term improvements are being accelerated and enhanced by ongoing investments by securities services providers who are quickly grasping significant technology-enabled opportunities for competitive advantage.
While the securities services industry continues to invest in and deploy new digital innovations, we believe that fully supporting clients’ needs occurs where technology and people intersect. At Standard Chartered, we recognise the value of expertise, experience and human judgement empowered by, not replaced with, the right technology. With technology such as cloud, AI and APIs already in play, and a pipeline of promising technology such as DLT on the way, we see that the securities services business will continue to go from strength to strength.
1 ‘Leaner, faster and better with devops’, Boston Consulting Group (March 2017) https://www.bcg.com/publications/2017/technology-digital-leaner-faster-better-devops.aspx
2 ‘Beyond fintech: A pragmatic assessment of disruptive potential in financial services’, World Economic Forum, 2017 http://www3.weforum.org/docs/Beyond_Fintech_-_A_Pragmatic_Assessment_of_Disruptive_Potential_in_Financial_Services.pdf
This article was also published by Euromoney.