The financial services industry has never fully recovered from the 2008 meltdown and heightened regulation, intense competition, and unsettled market conditions make financial services an industry that is facing unrelenting headwinds. How to cope in such an environment? Transformation driven by technology.
The old saying that “necessity is the mother of invention” is certainly true these days in financial services markets. Battered by the 2008 meltdown and the tsunami of regulation that followed, financial services firms have faced a difficult environment of rising costs from both regulation and technology along with declining margins and cut-throat competition. In this difficult environment, financial services firms have had to get creative in order to survive and thrive and new frontiers of technology have been at the forefront of this effort. Companies have turned to everything from cloud to big data techniques and even emerging technologies like blockchain to meet these challenges head on. In this article, we’ll give you 3 examples of how forward-thinking companies are leveraging technology to overcome industry challenges, but also to get ahead.
Even Regulators Can Leverage the Cloud
The Great Recession ushered in a new era of regulation as epitomized by the Dodd-Frank Act. In addition to the already swelling increases in data and messages arising from the continued electronification of markets, new regulation brought additional requirements for reporting, compliance, and surveillance that only exacerbated data requirements. One of the great ironies of these new requirements is that they not only imposed burdens on market participants, but on market regulators as well. In the case of Finra, the independent, self-regulatory agency for the securities industry in the U.S.,1 up to 75 billion records are now processed in a day and data volumes can quickly expand and contract at a rate of 3x interday.
How to cope with such a burden? In the case of Finra, the solution was in the cloud. Beginning in 2014, Finra embarked on a 2 ½ year project to rewrite, reimplement, and re-architect their systems. While a key goal was to improve cost effectiveness, other objectives included building flexibility into the size of their system, deploying better and deeper analytics tools, and a re-allocation of resources from maintenance and support to value-added development. To date, Finra estimates that they will save up to $20 million annually and the improvement in innovation and responsiveness is virtually immeasurable. The challenge of larger data and increased requirements turned out to be the catalyst for an transformation effort that saved money and improved performance and responsiveness.2
New Regulation + Data Analytics = Win/Win
On the other side of the coin, the rising demands from regulators for enhanced surveillance and compliance functions has made life difficult for market participants. Coupled with the previously mentioned explosion in data, participants on all sides of the market have been hit with new requirements and obligations that traditional systems are not equipped to handle. In this environment, companies like Chicago-based Neurensic have utilized cutting-edge technology to efficiently handle new mandates.
Nuerensic is a SaaS provider that utilizes artificial intelligence and machine learning to address compliance and operational issues at trading firms. Their tools analyze data from trading activities to monitor and detect patterns that indicate abusive or risky behaviors and have the ability to learn as new data becomes available. In fact, Nuerensic can take things a step further by using their tools to do a deep-dive analysis of customer profitability. As such, they are addressing the most pressing needs of their customers by utilizing the very latest technologies and then going a step further to make a negative into a positive: instead of simply adding a cost for compliance, an enterprise can actually take steps to improve their bottom line.
Beyond the Cutting Edge: ASX and Blockchain
Sometimes the emergence of new technology conveniently occurs concurrently with the need for transformation. Such a scenario seems to be playing out with ASX, the parent of the Australian Stock Exchange.
ASX operates the trading and clearing for the Australian stock market and faces a situation where their technology is old and in need of a refresh. In order to compete in the highly competitive global capital markets, Australia could not risk falling behind by staying too long with outmoded technology. Beginning in early 2015, ASX began a process to replace or upgrade all of its main trading and post-trade systems. Phase 1 to replace the trading side of the equation is well underway. As attention now turns to the post-trade side of the equation, ASX has made the bold move to explore the possibility that blockchain can power their next generation system.
Blockchain is the technology behind bitcoin and it represents a revolutionary new idea for capital: an asset in the form of software on a distributed database. Blockchain may make it possible for the post-trade lifecycle of a transaction to be more efficient both in terms of time and cost. In exploring the use of blockchain as a possible methodology for their new, post-trade system, ASX is making a bold bet that they can harness the new technology in a way that gives them an edge over all of their international competitors. In a time when regulation and infrastructure costs are rising inexorably, an ability to streamline and reduce the cost of processes may have profound impacts on both profitability and competitive position. ASX has teamed with blockchain leader Digital Asset Holdings (DAH) to explore blockchain and initial results are due later this summer. Stay tuned for details.
The View from Maven Wave
At Maven Wave, we provides services, guidance, and insights that help our clients make the most of any situation; whether it be a “blue ocean”3 opportunity to enter a new market or, more likely, respond to market and technology changes that demand a response. In the best of circumstances that means seizing a new opportunity, but often times, the impetus is to respond to new technology, a changing market landscape, or other external threats. In that case, the response becomes one of survival and the stakes are that much higher. As illustrated in the cases above, the emergence of new threats can often mean seizing new opportunities. When it comes to addressing the latest technological trends, including cloud, data analytics, and emerging technologies, Maven Wave has the expertise and experience to lead bold transformation programs.
Contact us for more information.
1Finra on Wikipedia and the Finra website.
2A video case study on Finra can be found on YouTube.
3“Blue Ocean Strategy” is an excellent resource for helping to identify and develop new and unique business niches.