LETTING GO OF THE PAST.
Keith Saxton, chairman of the Financial Services and Payments Programme for techUK, explains why banks need to move technology to the top of their agenda.
What are the greatest challenges facing financial service institutions from a technology perspective?
In the past, the industry would look at big events in terms of being a bull or bear market. This drove a great deal of behaviour and if there was a downturn, banks would make cuts and then when revenue returned they would hire armies of people back to deal with the backlog of work. The financial crisis changed everything. Today they can no longer rely on past behaviour because the business model has fundamentally changed due to regulation. Revenue streams have been damaged and return on equity is down to the 2% to 4% range for the major UK banks versus the teens in the fifteen years prior to 2008. We have had a number of conversations with banks and there is a great need for infrastructure revival and a new way of thinking about technology. However, many firms look at technology as a barrier, but they should see it as an enabler to change parts of the value chain and help deliver higher returns. We see many examples of technology and new services being deployed, although the underlying infrastructure remains inflexible.
What progress has been made from your first White Paper?
There has been movement since the publication of our first White Paper – Towards a New Financial Services – over a year ago. The majority of companies have developed new technology strategies and begun initiatives but some are farther ahead than others and in general, in all but a few cases, real momentum is lacking. One reason is that banks have been reluctant to take the risk and incur the significant cost involved in moving from their old legacy platforms.
We have just published a second White Paper – Taking the Initiative: Leading with Technology in Financial Services – which expands on this theme. It not only discusses how legacy systems are limiting the progress banks can make but why and how they need to implement a completely new return on investment approach with technology. The aim is to build competitive, agile, fully inter-operable systems that will benefit the clients and create new products.
What is the main thrust of the second White Paper?
There are three distinct sections. The first is that financial service firms must change core systems to make better use of cloud technologies, allowing for an agile response to shifting consumer demand and regulatory requirements. Second, incumbents must use data and analytics to enhance performance. While the last section shows a renewed emphasis on customer experience is needed to improve customer satisfaction. All three areas need to be addressed concurrently to drive competitive value.
Can you go into more detail about the use of the cloud?
In the past, the saying was that banks spent 80% of their time running the business and only 20% on innovation. Today I think that 80% of the 20% is spent on regulatory compliance. Unless these projects are collectively renewing systems and collapsing data silos the investments will not be effective. We definitely see the cloud and cloud enabling technologies playing a greater role for financial service firms especially in terms of addressing the issues associated with legacy systems. One of the main problems is their inability to extract information and link the data. The cloud, on the other hand, is able to better to respond to additional volume of activity and changes in customer or regulatory requirements. Firms should be able to build localised clouds which use APIs (application program interfaces) that transfer data without collapsing the system, and allow for that data to be exposed for analytics and insight.
Adoption has been slow not only because banks are reluctant to move away from their old systems but also cloud technology has yet to gain the full approval of the regulators. This is changing as the Financial Conduct Authority and other regulators are now more interested to engage with the sector and suppliers to discuss how cloud might be more extensively deployed to access the intrinsic improvements available in operational risk management, cost, availability and security. I think when this happens, cloud-based systems will be the default option across the sector.
How can banks better leverage their data?
There is a great deal of discussion over big data. Many of the larger financial services firms have significant amounts of data but they are often held in silos and not integrated throughout the organisation. A more holistic approach is needed. It would enable management to extract customer, operational and transaction data from multiple sources This would give them greater control over their business in terms of capital and resource allocation as well as risk management and compliance with the new regulations. The data could also be used for predictive purposes and help ensure that the right product was placed in front of the right customer in a timely manner.
What are some of the main issues in the post‑trade world and what solutions are on the market?
Until now, most of the technology spend has been in the front office rather than in the back and middle offices. However, I think they will be a major focus of fintech investment because they have the same requirements as the front office, such as real time collateral management, as well as data governance. We could, for example, see an increase in the use of cloud for aggregation and consolidation of information.
Another development we see is blockchain technology that underpins the cryptocurrency Bitcoin. It could, for example, be used in the settlement process for derivatives. At the moment, post-trade providers still have legacy systems running in the background, but there are many firms trying to identify how blockchain technology could effectively be used.
Things are changing but do you see banks moving IT higher on the agenda?
One thing that companies can look at is if there is enough representation of IT at the board level. Other than the chief or senior technology officer having a technological background, others have to demonstrate that he or she understands the risks to the business and how technology can help address the issues. For example, from a personal viewpoint, I do not classify myself as a technologist but someone who can see both sides when trying to grapple with the issues of an incumbent versus new technology discussion.
Biography: Keith Saxton is chairman of the Financial Services and Payments Programme for techUK, the UK trade association for the technology industry. As an independent advisor Keith is engaged with a several organisations, from new entrants to large established players, helping with business strategy, technology imperatives, FinTech initiatives, and risk management. Saxton was also an expert panel member for the recent UK Government Office for Science FinTech Futures review, and is a member of the advisory council at Innovate Finance. Until recently Saxton was leading IBM Research’s Financial Services strategy. At IBM he held various industry-focused leadership positions for a number of business units at a country, regional and global level. Prior to joining IBM, Saxton worked in the industry for over 20 years and held a number of executive positions including managing director of fixed income capital markets at Scotia Capital Markets, board director and head of fixed income at IBJ International and head of fixed income trading at a Deutsche Bank.