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The value of financial utilities

There is straightforward value in financial service providers delegating mundane non-core activities to an emerging set of financial utilities. That was the key takeaway from my first post.

But financial utilities have the potential to enable a range of benefits extending beyond mere "chore-broking". For instance, they can deliver significant cost reduction, which in our own experience, could be as high as 60 percent of the cost per trade. More importantly, utilities enable banks to shift to a variable cost model where pricing may be linked to simple transaction volume, or to more complex business outcome-related metrics. Going forward, there is a huge business opportunity in such gain-share models.     

By taking on the stewardship of non-core activities, financial utilities enable banks to hone focus on pure business-generating activities such as sales, marketing, relationship management, bank-specific pricing, risk management and value-adding services. Banks are free to concentrate on building competitive advantage by accelerating time to market, improving service delivery and enhancing quality of output. Once the utility model reaches maturity, banks will also be able to simplify their technology architecture by leveraging "bank-in-a-box" standardized workflows.

As the utility model evolves, expect to see a variety of formats - from the inclusive and comprehensive SWIFT model to lighter 'single platform-single bank' variations. We will also see strategic variations in the way these utilities are conceptualized, developed and deployed. There is already the cooperative bank-driven strategy that created Clarient. Then there is also the possibility that a single institution will take on the onus of development and then offer it to the larger ecosystem. Or a third-party technology vendor might offer the technical backbone directly to a leading market player like say, DTCC. New utility models could even emerge from partnerships between technology service providers and leading product vendors.

But irrespective of the variations in partnership and structure, every utility will eventually be ratified on its ability to enable productive collaboration between all stakeholders including banks, product vendors, market infrastructure players, leading technology companies and probably even regulators. But given the fact that most regulators are still circumspect about how much utilities should be allowed to do, especially in areas like compliance and risk management, it will be interesting to see how their future unfolds.

We'll talk about that in my concluding post.

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