Commentaries and insightful analyses on the world of finance, technology and IT.

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September 24, 2015

The rise of financial utilities

Successful banks typically run a tight ship, constantly on a quest to wring out some more cost and performance efficiency from already optimized operating models. In recent years, that traditional diligence has been pushed to its limit by the general economic gloom and consequent pressure on returns and revenues.  

Accordingly, more banks are now taking their efficiency scalpels to the realm of regulation and compliance at a time when the cost and redundancies involved in complying with KYC, AML and ever increasing regulation is coming under intense scrutiny. This is leading to the creation of entities like Clarient, a client data and documentation utility launched by a clutch of Wall Street banks together with the DTCC (Depository Trust & Clearing Corporation) that acts as a centralized hub for internal onboarding services and also helps banks manage a range of regulatory requirements towards KYC, FATCA, EMIR and Dodd-Frank. Other prominent examples include KYC registries from Thomson Reuters and SWIFT, which itself has more than twenty participating banks.

Interest in these industry utilities continues to rise. In fact, many of our financial services clients - especially mid-tier institutions with relatively higher costs per trade - have expressed interest in co-creating utilities for centralizing post-trade process servicing, KYC/onboarding, reconciliation etc.

The role and relevance of an entity that aggregates and abstracts common, undifferentiated activities into a packaged, readily consumable service is fairly obvious. By centralizing important but non-core and standardized functions, financial institutions can improve savings, transparency and control. More importantly, they can also become more agile in responding to the frequently changing dynamics of the regulatory regime.

We believe that over the next three to five years, utilities will evolve into a central role within the financial services industry. After all there is definitive value in the fundamental premise of releasing banks from the chore of non-core activities. But what about the role and value of financial utilities beyond that basic promise?

That's in my next.

September 7, 2015

Flip a Bit

A coin has two faces and which one shows up when it is flipped depends on probability. In a normal, unbiased coin, each side has a 50% probability of showing up. However, if we shift our attention to the coins that are in vogue and live only in computers, that is, bitcoins - we would observe that here, the probability of seeing the other side of the underlying technology used in bitcoins is substantially less than half.

The main technology used and talked about is the block chain. The goal of this technology, simply put, is to remove, as much as feasible, the people, their influence, and their interference from the methods of transferring money, contracts, data, and all such information where ownership knowledge is important.

So does this mean the technology, which is considered to be faster, cheaper, and more secure than other transaction methods, be only restricted to bitcoins? That has never been the case with anything of such importance, and it is not going to be this time either; new and more interesting uses of this technology are not only being ideated, but put to use as well. Take a guess what a Goldman Sachs-funded start-up working on block chain, would be used for? If you thought bitcoins, you thought wrong. The start-up tracks and protects the U.S. dollar using block chain technology.

Likewise, from music streaming, currency tracking, to a failsafe voting system, block chain is finding use in a legion of ways, in almost every industrial landscape. In fact, a mini-industry has started taking shape around this technology. In the first half of this year, $375 million has been raised by start-ups whose business model is based on the use of bitcoins and its underlying technology. The amount of $375 million is in half a year is actually 10% more than what was raised by starts-up with similar models in whole of last year.

But road to glory is never strewn with flowers, on the contrary it is usually filled with thorns. Keeping true to this rule, not all is rosy with blockchain technology, as it is still being considered a risky bet at best. There are technology and perceptional issues that are preventing block chains from becoming ubiquitous. One must also consider the vested interests, such as those of the retail banks that stand to gain from the processing delays and other inherent inefficiencies of current system. Blockchains are likely to wipe out the delays in processing as well as the profits banks gain from differences in fees and interest and other such lacunae but it would be arduous fight before industry as a whole and banks in particular concede to real-time processing technology.

In spite of such impediments, the march to popularity has started and over time, blockchain is sure to find more adopters, and this, in all likelihood, would start a virtuous cycle of more adopter, more technology, and more convenience, leading back to more adopter. It would be interesting to see if the underlying technology, i.e. blockchain, become more popular than overlying service i.e. bitcoins. My guess is as good as yours, so till the clarity is reached flipping the bitcoin to bring in more and interesting use to what underlies it should continue.

September 4, 2015

Cross-Border Regulations' Coherence - a hype or need of the hour?

- by Ashima Uppal and Mayur Bansal

Regulations are essentially the prescribed ways of conduct in an otherwise un-organized environment. They are the binding rules that bring harmony, and set standards for every participating entity to follow.  But, what if the surrounding environment is so different across the globe, it starts to reflect a discord between the rules of different areas?

This question aptly points to the current state of financial regulations across the globe in which - the liquidity of OTC (over-the-counter) markets is majorly divided between the US and non-US funds. Third country CCPs (Central Counterparties) have found it difficult to gain European Commission recognition under the EMIR (European Market Infrastructure Regulation). Additionally, non-EU trading institutions have faced the delay of equivalence being given under MiFID I. It is not only the capital markets, but also the banking structural reforms that have differing national and regional approaches. This is making the markets prone to the risk of fragmentation, reduced competition, and reduced number of diversified sources of funds .

These differences in the regulations may also pose as a hurdle for the developing economies. They might reduce developing countries' access to global capital markets, adversely affecting their growth prospects. The variance between regulations are majorly a result of the distrust between the regulators, high complexity of the new rules, and inconsistent implementation processes which surface due to differences in legal and political models. There have been various appeals to bring consistency in the regulations across boundaries, for which reaffirmations have also been provided by global leaders on platforms like the G-20 summit. The major showstoppers, however, are the unilateral approaches and un-synchronized implementation of rules that have impaired the global approaches from bringing harmony across regulations.

Although the issue of incoherent rules affects every region and jurisdiction, it is the Asia-Pacific and other emerging markets that face most difficulty in regulatory arrangements. The disagreements between the US and EU regulators have delayed the development of the regulatory frameworks of APAC countries. APAC countries want their regulations to be consistent with the global regulations. To get to that stage, APAC countries have to draft their regulations so broadly that they can accommodate both US and EU regulations. For instance, Australian regulators allowed the derivatives players in Australia to adhere either to the US, or the European approach. The APAC region also has various US and EU organizations as major players, which makes it difficult for the APAC countries to choose one regime to comply with.

With the growth of the global economy, APAC countries are gaining importance in the international markets and are becoming the growth-drivers of the world. The issue of regulations' disjointedness needs to be addressed. A more harmonized market environment needs to be developed to fuel international growth.

September 3, 2015

Advancing beyond analytics

In today's world, knowledge is power, and anyone who can harness this power is going to have an edge over the others in every single way. This knowledge comes from information, which in-turn is processed data. Today, we have several means to collect or gather data, but how well we can use that data depends on how well we analyze it. Over time the data collection, as well as the approaches to analytics have evolved.

The orthodox approaches (such as query and reporting) of business intelligence (BI) were found to be lacking in coming up with insights required for the present day industry. Thus, an alternative was found in sophisticated quantitative methods such as statistics, descriptive and predictive data mining, simulations, and optimization. This new approach to analytics was an advancement over the traditional methods, in the form of organization, coherence, effectiveness, and accuracy in the insights. Thus, the field of advanced analytics was born - as with all other things - out of the necessity to achieve perfection beyond the current methods.

Organizations are attracted towards advanced analytics as it helps them gain insights and improve decision making. Along with this, it also helps them to detect frauds, optimize the next best offer for customers, and in maintenance activities using predictive methods.

In the financial industry, there are multiple examples of the use of advanced analytics. Case in point - the Nordic Danske Bank relies on advanced analytics from Dell Statistica to be able to provide quick and accurate services to its customers, 24/7. In a highly competitive industry like banking, customers are not happy to be served with just traditional "bankers' hours" of 10 a.m. to 3 p.m. They want to be pampered with not only 24/7/365 access to their accounts, but also services such as transactions, loans and alerts. To provide such services, the financial industry was forced to use a variety of analytical models; and it is this increasing adoption of analytics that gave the advancement of analytics a push.

Consider the following fact to gauge the momentum of the advancement of analytics - over 72% of analytics initiatives which have been announced by banks over the last couple of years have been for advanced analytics.

Before we get too gung ho about the above figure, we must remind ourselves that so far, the major focus of advanced analytics has been only on descriptive capabilities. However, portfolios of analytics capabilities of all sectors, such as banking, are slowly-but-surely being extended to predictive and prescriptive analytics, from just descriptive analytics.

What does this hold for solution providers? A reputed research firm says that advanced analytics is a top business priority. This is further confirmed when we consider the fact that within BI, advanced analytics is the fastest growing segment, and has surpassed $1 billion in 2013 itself. Financial services have been at the forefront of this growth and are likely to remain so for at least next 5 years. Banks have been using predictive analytics and cognitive computing - which are types of advanced analytics - to discern unsavory transactions before they can have any impact on the banks and their customers.

A cursory glance at history would tell us that the advancement of technology is not a steady curve. There are plateaus, upward spurs, and sometimes reversals as well. Let us wait and watch how things move in this particular space.

Robo-advisers: Terminator or Transformer?

In recent times, Robo-advisers are in the limelight. Robo-advisers are in no way related to the Terminator or the Transformers movie series. You never know though - looking at the sudden interest in robo-advisers, it may turn out to be a blockbuster. Now, who are these robo-advisers? 

Robo-advisers are a class of financial advisers that provides automated (algorithm-centered) investment services. As part of their offerings, robo-advisers can handpick investment portfolios (allocate), rebalance portfolios (automated rebalancing), and offer tax-loss harvesting. Robo-advisers offer personalized portfolio services through top-quality digital (online and mobile) channels, at a reduced cost.

The likes of Wealthfront, Betterment, and other robo-advisers have been successful in attracting funding from Private Equity firms, Venture Capital funds, and strategic investment arms of banks. For instance, in the beginning of 2015, Betterment was able to raise $60M in a new round of funding, while Wealthfront raised $64M in the last quarter of 2014. This funding is in addition to what they have already been able to raise. Robo-advisers have not only attracted funding, but also the attention of battle-hardened financial service industry players to robo-advising. These traditional players have taken different routes (like partnership, own service, acquisition, etc.) to enter the enticing robo-advising space. For instance, Charles Schwab formally launched its own robo-advising service - the Schwab Intelligent Portfolios in the first quarter of 2015. Fidelity partnered with Betterment to create a tool for Fidelity's registered investment adviser clients, while Blackrock has acquired FutureAdvisor, a robo-adviser. Also, in recent times, big players like Merrill Edge and Wells Fargo have also announced their plans to join the robo-adviser race. This is just the beginning of a new trend of traditional players exploring the robo-advisers space more closely.

These new launches and announcements are clearly pointing towards a trend that robo-adviser is here to stay and they are entering main-stream. For now, the robo-adviser cannot definitely replace the traditional financial advisers, but traditional firms cannot completely ignore the robo-advisers' easy to use, low-cost, digital advisory services. They are a compelling selling proposition to the new age millennial and mass-affluent population. For the traditional financial advisory industry, robo-advising can certainly be a value-added service offering to target a niche audience. 

It's too early to predict whether Robo-advisers will be the Terminators of the traditional financial advisors or the Transformers, who provided the necessary boost to the industry. Only time will tell. I am watching this space with keen interest. How about you?