Robert Palatnick (left) and Andrew Hilton
Even as digital innovations like cloud computing and distributed ledger promise to reduce costs, boost operating efficiencies and bolster resilience, the financial services industry is constrained on many fronts—budgetary, cultural and regulatory among them—from a rapid and wholesale transition to these technologies.
A panel of industry veterans addressed these constraints and offered ideas to overcome some of them to kick off the Disruptive Technologies Forum 2016 that took place November 29th in London.
The lead-off session of the forum, co-sponsored by DTCC and the Centre for the Study of Financial Innovation (CSFI), was moderated by CSFI Director Andrew Hilton and featured Rob Palatnick, DTCC Managing Director and Chief Technology Architect, Justin Chapman, Global Head of Market Advocacy and Innovation at Northern Trust, and Simon Taylor, Co-founder of London-based FinTech consultancy 11:FS.
Ripe for Innovation
All agreed the financial industry is ripe for massive technological innovation. “I’ve never seen a set of organizations that want innovation more than financial services,” Taylor said, “because they find themselves in this incumbency industry with a lot of legacy cost, really trying to transform.”
According to Chapman, because of their legacy architecture, firms are now at an inflection point that calls for “significant disruption” in their technology.
Blockchain would certainly entail that level of disruption but a host of discrete applications are also ready for turnover. Palatnick cited DTCC’s Trade Information Warehouse repository for credit default swap transactions. DTCC is looking to replace the mainframe application, he said, because its costs need to be “right sized.”
But managing the costs and time horizons of new technologies poses a major challenge, panelists noted. Hilton lamented firms’ “impossible” situation: deciding when and how much to invest in a new technology like blockchain that is constantly evolving and, as a result, may be outmoded in months. “With all these different parts, moving at different speeds and different directions, how can anybody plan?” he asked.
While banks have no choice and must undertake the spending required by technology innovations, Chapman said, the sharp reduction in average return on equity since 2007 means firms must try new strategies to hold down innovation costs—collaborating with others and outsourcing some functions, for instance.
Regulatory challenges are equally formidable, panelists concurred. As Taylor put it, “On the one hand you’re being pushed for innovation; on the other you’re regulated and hit for even daring to innovate.”
The fact that some agencies and rules frameworks—supervisors in certain emerging markets, the UK’s Financial Conduct Authority (FCA), Dodd-Frank on the issue of implementing distributed ledger were cited as examples—are more open to new technologies than others is not a great benefit to firms that have a global footprint.
“Until they harmonize and come up with a single standard, we’re going to face different regulatory standards in different locations,” noted a forum attendee from Deutsche Bank. “So if one regulator says yes to the cloud, we still can’t move because others say no.”
Yet forum participants acknowledged that the financial industry is and should be held to higher standards of safety and resiliency than other sectors.
“Resilience is a requirement for DTCC,” Palatnick said, adding that innovative technologies must be deployed with great care. But legacy systems are not inherently safer than new ones, he continued, noting that the cloud can offer an organization more resilience than multiple proprietary data centers.
Panelists proposed ways to help bridge the gap between the industry’s growing need to modernize its technology and regulators’ tendency to move cautiously. Engage with your supervisors early and often, Chapman advised, to educate them about new technologies and their benefits. Make regulation more technology-driven, urged Taylor, and nudge regulators to adopt technologies that improve their operations, like moving their infrastructure to the cloud as the FCA has done.
A culture of Innovation
Even if freed from regulatory and budgetary constraints, firms will not be able to embrace disruptive technologies without a commitment from their leaders. To that end, Chapman and Taylor emphasized education and culture change need to start at the top.
Chapman said his group’s role at Northern Trust is “to look at innovation in the company as business innovation, not just technology innovation, which is probably the starting point to educate through to our management group and our board.”
If a firm creates a culture that “puts innovation at the core of your business,” he said, it can work to understand whether innovation can create opportunities. Such a culture requires a commitment to invest for the future, which may slightly reduce revenues, Chapman conceded, but in the end will increase margins because the business has become more efficient.
A pro-innovation culture will be most effective, Palatnick concluded, if an organization breaks problems and processes into small pieces and tackles them individually. “That’s how you can make progress,” he said. The speed of change is also critical. “Distributed ledger has transformational potential,” Palatnick asserted, “but it needs to be adopted at the right pace.”