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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.

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