December 2017

How can disruptive technologies help a legacy and cost-intensive industry retain its competitive edge?

External forces – including changing client needs and regulatory interventions – are forcing the securities services industry to identify innovative solutions in order to retain its competitive edge. Securities services’ dependence on manual processes is coming to an end as the sector looks increasingly towards digitalisation and emergent technologies to deliver products and solutions more efficiently to end clients.

Anand Rengarajan, head of securities services for Asia-Pacific (APAC) at Deutsche Bank spoke at the Network Forum Asia Meeting in Hong Kong on November 13, 2017 about how technology was going to reposition the industry, and explored some of the drivers facilitating these developments.

The Drivers

Those attuned to natural sciences will be fully aware that even the most minute change in any ecosystem can have major upstream consequences. The same is true in the securities services industry. Low returns have prompted investors to press harder for fee discounts at their asset managers.

This client pressure is forcing asset managers to truncate their own budgets and demand fee concessions from service providers such as custodians.  At the same time, service delivery expectations from clients have risen as organisations increasingly demand real-time reporting and customised products. “The client side needs more services for less,” commented Rengarajan. 

Regulation since the crisis has also introduced new challenges and costs into the securities services world. Balance sheet capital requirements demanded under Basel III have made banking more expensive, while liabilities have been broadened through passage of UCITS V and the Alternative Investment Fund Managers Directive (AIFMD).

“The world in which we operate is becoming increasingly complex as a result of changing client demands and increased regulation. These drivers are introducing new costs into securities services and it is the role of the industry to identify efficient ways of addressing these problems,” said Rengarajan. Many view technological innovation as an effective means of keeping these challenges in check.

Digitalisation levers

The industry’s approach towards disruptive technology has evolved and matured over the last 12 months. “A year ago, the industry was theorising about the applicability of disruptive technology. Today, banks are piloting the technology and a handful are even close to implementing actual solutions using the technology. I anticipate more full-scale adoption of disruptive technology by banks will take place in the next 18 months,” said Rengarajan.

A growing number of these organisations are taking advantage of regulatory sandboxes, which allow companies to trial and experiment with new technologies in a confined environment. Such sandboxes, which have been established in major markets including Singapore, Hong Kong, Australia and the UK, create a safe environment for companies to beta test technology before rolling it out to a broader audience and market.  

The most widely lauded innovations being explored by securities services are Blockchain and machine learning. Blockchain, an immutable shared database, has the potential to transform securities services paving the way for unmatched automation. Blockchain, for example, will allow for real-time, non-duplicative recording of transactions and T+0 settlement, something which may disintermediate custodians, CSDs (central securities depositories) and CCPs (central clearing counterparties) from the post-trade settlement cycle.

Other areas where Blockchain will have a visible impact include corporate action issuance and processing, regulatory and investor reporting and reconciliations.  Rengarajan acknowledged that client account opening and on-boarding processes, both of which are notoriously slow due to various regulations and KYC/AML requirements, could be dramatically improved if banks applied nascent technologies like Blockchain more readily.

“Disruptive technology will make client on-boarding far simpler by speeding up the process. At present, it can take several weeks to on-board a client because of the various due diligence steps that need to be taken. Digitalisation could speed the process up without compromising the veracity of the client due diligence,” said Rengarajan.

In a macro environment where costs are rising, Blockchain could help the industry purge itself of many high-cost legacy systems and manual processes, creating significant synergies and efficiencies. Blockchain will also introduce heightened transparency in securities services processes and assist organisations by enhancing their protection of data through its sophisticated encryption techniques.

Machine learning capabilities are also being integrated into securities services processes, although banking remains well-behind other industries in terms of its acceptance of the technology, a point made by Rengarajan. He highlighted how some medical practitioners in Asia were increasingly using robotics for cancer diagnostics and the results had been hugely successful, and urged banks to accelerate implementation efforts of such technology.

The advantages of robotics – excluding its cost-benefits – are its speed and accuracy when processing large volumes of data. As custodians increasingly explore opportunities to leverage the huge amounts of client data that they hold, many are looking towards robotics and machine learning as tools to aggregate and structure the information. As such, robotics will change how custodians help clients with their reporting needs but it could also allow them to package data for customers, enabling them to undertake more accurate benchmarking exercises.

The Next 12 Months

Many of the value-adds offered by securities services are being threatened by nascent technologies. If the industry is to cement its existence moving forward, it needs to embrace these disruptors opportunistically, as opposed to finding fault with them or delaying progress. However, securities services is a systemically important component in the financial ecosystem, which means adoption of new technologies is something that cannot be rushed or implemented impulsively without contemplation of its impact on legacy systems or clients.   

“Three years ago, the industry thought disruptive technology’s impact would not be felt for some time. It has since dawned on securities services that advancements were emerging faster than they thought, prompting banks to accelerate their strategic implementation of these technologies.  The industry is on the cusp of transitioning into a digitalised offering,” explained Rengarajan.

As securities services confronts heightened regulatory costs and fields more testing demands from clients, it is turning to disruptive technology as a mechanism to provide an answer to those problems. Such innovations will help eliminate many of the overheads that are engrained in manual and repeat processes, allowing securities services to deliver a more streamlined and efficient service to clients.

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