Automation Innovation Changes Banks
TEDx - Simon Dixon - Changing The Rules of Banking @TEDtalks [http://www.youtube.com/watch?v=zUl9nOqaU8s]
A wrap is more than just a tasty sandwich rolled up within a soft tortilla shell. And it's more than what a director of a movie yells when they film the final scene. In the financial services world, a wrap is another term for a banking innovation known as the Unified Management Account (UMA).
Up until recently, a money manager who was doing the bidding of his clients - to build a diverse portfolio of stocks, bonds, and mutual funds - would open up a separate account for each asset class. The UMA, or wrap account, allows the banker to place all of these diverse assets into one account. Doing so saves a lot of time and money. In turn, the bank has the ability to serve more clients, so it can be more profitable.
Indeed, the "wrap revolution" is an exciting development in how the financial services sector is evolving to meet the needs of its individual clients. It used to be that it was relatively inefficient for a bank to concentrate a lot of time on a single individual when it could be catering to a large institutional client instead. The development of innovative products like wrap accounts allow single consumers to get the kind of attention only the big institutional players would otherwise receive.
In a recent exposé on new wealth management techniques, the act of maintaining a separate account for each asset class and each money manager translated into severe limitations as to what the general audience of investors could access in the capital markets. Not surprisingly, it became a back office issue. Few banks had the manpower to handle a huge number of multiple accounts.
The warp innovation reminds me that there's truly no value in doing things that aren't simple anymore. This statement might seem a bit obvious. But think about the bank situation. Enterprises often go through a business process that's outdated and filled with unnecessary functions because that's all they've ever known. It's often very difficult for an organization to slam on the brakes and reassess age-old methods and best practices.
With the advent of automation, the financial services sector is evolving more rapidly than it has in the past three decades. Remember what happened 30 years ago with the introduction of automated teller machines (ATMs)? People didn't have to wait in order to get in front of a teller. IT services, especially as they refer to the financial sector, are becoming automated as well. The back office triumph of the Unified Managed account is just one of many financial sector innovations that depends on automation to fuel back office functions.
The entire sales and trading functions of banks have become a lot more nimble because of automation. In the old days (meaning not even 10 years ago), a customer's "buy" order for a stock would have to be relayed to a broker on the floor of an exchange, where that broker would do his best to settle on a price nearest to what the customer wanted. The deal would involve a lot of interpersonal back and forth on the floor of the exchange. Once the broker bought the stock, the customer would have to pay a commission for his efforts. And the back office functions could be Byzantine. Huge "clearing houses" had to verify each and every transaction of the trading day.
With the preponderance of automation, a customer is closer to becoming his own market maker. Have you heard about the phenomenon of the last decade called "dark pools"? These are pools of capital in which prices that are set for certain securities aren't transparent to those outside or even inside the pools. So in a way, the exchanges themselves are being pushed aside by financiers who use automation to create their own markets. And very lucrative markets at that because they cut out the middleman and automate those complicated back office functions.
Who knew that when the friendly ATM hit the scene some three decades ago that the banking world was on the verge of an automation revolution? And once again, putting technology into the hands of individual customers has helped them invest bigger...better.