The next stage of the technological evolution for the financial industry

By JR Lowry, EMEA head of State Street Global Exchange

As 2017 unfolds, we continue to be in the midst of a high-change period in financial services, with the evolution of technology teetering on the edge of radically re-shaping the entire industry.

The period of hype surrounding the term, ‘big data’ has given way to a more measured reality, however, ‘data’ and ‘digitisation’ are increasingly defining our day-to-day working lives.

As more devices become digitised, more data is being captured. As this data comes to market, investors are going to need to figure out how to ingest all of it, mine it and understand where its value lies. Some of it won’t be useful from an investment standpoint but some will inevitably have investable value. Separating that signal from the noise in the face of all this new data is going to be a significant challenge for most investment firms.

In view of this shift, firms are making increased technology investments, as they strive to aggregate data and use overlay tools, like machine learning, to help interpret that data. A by-product of this wave of new data is a greater range of analytical tools, including sentiment and behavioural and predictive analytics. It’s impossible for humans to digest all of this new data themselves, so the balance of man and machine will continue to tilt more towards machine. The question often asked is how?

‘RegTech’ and ‘blockchain’ are just two examples of buzzwords that continue to generate hype – and for many are the answer to this question; offering a solution or the facilitation of a solution for their big data needs.

RegTech

It’s no secret that regulators around the world are asking for more data, whether in the form of MiFID II, PRIIPs, Solvency II, EMIR, or other new regulations. They are also setting a higher bar through BCBS 239 and other new rules, with respect to the quality and governance of the data that is sent to them. They are similarly raising expectations in terms of market surveillance, such as through the European Union’s Market Abuse Regulation (MAR). Hence financial institutions must not only apply new data and analytic techniques to the search for alpha, but they also must do so with respect to regulatory compliance.  No firm wants to be in a position where the regulators uncover malfeasance from their data when they themselves did not.

From a technology perspective, these new regulatory requirements and expectations have fuelled the interest in RegTech which will ultimately lead to an improvement of tools for risk management and compliance and hopefully a reduction in compliance costs relative to what the industry is currently incurring.

Blockchain

Along with RegTech, blockchain continues to be an area of widespread industry interest. Speak to nearly any market participant and they will acknowledge a belief that blockchain is going to have a significant impact on financial services in some shape or form.

Blockchain is one of the more compelling vehicles of technological disruption. In a nutshell, this is because it could create a single source of truth for many of the industry’s transaction types, with far-reaching consequences. As such, because of its distributed-ledger model and use of asymmetric cryptography, it has the potential to create reporting and record-keeping systems that are not only more efficient than existing options, but also more transparent and secure.

More industry processes will likely move towards blockchain models in the coming years. We polled 100 institutional investors in January last year and found 57 percent expect blockchain to be widely adopted in the next five years[1]. Despite these beliefs, investors are unprepared, as only seven percent currently have initiatives underway on blockchain, and 64 percent say they need more time to understand it better[2]

Blockchain will have a significant impact starting with inefficient areas, that are (a) manual, (b) require a lot of stakeholders to engage, align and sign-off, and (c) have intermediaries that create a single point of failure and add cost to the system. Early implementations are likely to be on a limited scale or in “greenfield” areas where legacy issues and standardisation requirements are less of a factor. The areas likely to be impacted first will be areas such as bank loans, liquidity management (collateral management, securities borrowing), derivatives, and broader settlement areas.

With broader adoption in the longer term, blockchain could ultimately become a standard for financial transactions and real-time settlement, increasing transparency and efficiency in a highly fragmented industry. This represents a fantastic prospect for the industry and one that represents exciting, new opportunities.

What next?

In certain aspects, the wider financial industry is still very analogue – as one example, we still receive roughly 50,000 faxes a week at State Street. However, even at this pivotal point of technological evolution, the industry has proven itself to be resilient and, as always, it will find a way to adapt.

 

[1] State Street Blockchain survey conducted by Oxford Economics in January 2016.

[2] State Street Blockchain survey conducted by Oxford Economics in January 2016.

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