Michael Bodson, President and CEO, DTCC
THE UK is fast becoming one of the world's leading fintech centers. So it was fitting that, last week, investors, consultants, multinationals, startups and entrepreneurs gathered in London's East End for FinTech Week 2015: an event where attendees could share ideas, network and, most importantly, do business together.
The expo focused on how to address the most difficult challenges faced by financial firms and their clients, such as the rise of alternative finance, an increasingly complex regulatory environment, and transformational shifts in how we invest, borrow and bank.
This year, we also saw the government reinforce the growing importance of fintech with the appointment of a special envoy, Eileen Burbidge (now also chair of Tech City UK), charged with promoting and encouraging investment in London's booming industry. Recent figures show that the UK fintech industry was worth £20bn in 2014, with £342m of investment flowing into the sector during the year. This was accompanied by the announcement that the UK plans to create 100,000 new fintech jobs by 2020, almost doubling the current total of 135,000. But these developments also hold potential for established financial services companies.
Collaboration to address the many challenges facing the industry will be fundamental to ensuring the long term health of the financial sector. It's a topic that comes up regularly in my conversations with clients - the need for financial firms, market infrastructures and regulatory agencies to work together to mitigate risk, enhance efficiencies, increase productivity, reduce costs and, ultimately, bring greater stability to the global financial system. There are many issues where the interests of all three groups are aligned. An important lesson learned from the past 40 years within capital markets is the need for firms to collaborate across operational boundaries. In the 1970s, for example, the volume of paper-based transactions in US securities reached 15m per day, meaning post-trade certificates were stacked ceiling high in dusty and often inaccessible rooms. Brokers would physically exchange securities certificates and payments, which were ferried from one person to another.
These processes were in dire need of both automation and simplification. "The Paperwork Crisis" was solved by the formation of The Depository Trust & Clearing Corporation (DTCC), a user-owned cooperative that automated, centralized and standardized processes in the capital markets, such as clearing and settlement. In this case, industry participants recognised that centralising functions within a market utility could provide enormous economies of scale to drive down processing costs while also mitigating risk.
We have seen this phenomenon play out many times during our 20 years of operations in London. Collaboration creates opportunities to evolve existing models for the better, and enables the industry to remain competitive by enhancing operating efficiencies. The fact that a UK bank recently started allowing customers to pay retailers through the use of Twitter handles speaks volumes about the ability of traditional financial institutions to reinvent themselves and the way they do business. Newer technologies, like blockchain and distributed ledgers, are intriguing as we explore ways to leverage them to further drive down post-trade risks and costs, while still meeting the high standards established through decades of market regulation and practices.
The key is to have a deep understanding of what clients want and how to be innovative in delivering new solutions. As in the past, this will lead to the continued evolution of financial technology, the operational processes of financial transactions and, on a bigger scale, financial markets themselves.
While systemic risks to the financial system are numerous and unpredictable in nature, coordinated action, underpinned by the latest technology, has already shown itself to be an effective way to maintain market integrity. For example, the reporting of derivatives transactions to trade repositories to enhance transparency and help mitigate systemic risk in the global derivatives market, or the implementation of kill switches - essentially circuit breakers to stop trading when sudden abnormal patterns emerge - developed in response to 2010's "Flash Crash", are key initiatives which will improve the resilience of the financial system.
Unfortunately, as technology continues to evolve, cyber risk is increasingly a major concern voiced by professionals across the financial sector. Despite rising levels of investment in cyber security, the number and destructive nature of attacks is growing. To combat these risks, we need a truly coordinated approach involving both the private and the public sectors across industries and national borders, as well as employing fintech to help improve information sharing and processes. The industry must defend itself collectively or risk failing individually.
In an environment where new regulations and heightened capital requirements are creating many challenges for the financial industry, there is a significant incentive and opportunity for firms to collaborate, by developing solutions that not only enhance efficiencies and mitigate systemic and operational risks, but also reduce costs for all market participants.
This article first appeared in City AM on September 23, 2015.